The moderating effects of environmental and regulatory quality on financial development to promote sustainable FDI inflows in Canada

Abstract

Stimulating sustainable FDI through the connection of financial development and its moderating relationships with environmental quality and regulatory quality emerges as a crucial agenda nowadays. This study investigates into this relationship using quarterly data from 1990Q1 to 2022Q4 for Canada; employing ARDL bound tests, Granger Causality, and FM-OLS econometric models. Foreign direct investment is the dependent variable of this study. The findings confirm significant long-run relationships among financial development, stock market development, and the moderating effects of environmental and regulatory quality on FDI inflows in the Canadian economy. Conversely, in the short run, financial development, stock market development, and economic growth exhibit bidirectional causal links with FDI, while environmental quality, regulatory quality, and trade openness demonstrate unidirectional causal links with FDI. The error correction mechanism indicates that all variables quickly return to equilibrium except trade openness. Robustness checks further confirm that all the variables have fully modified co-integrating relationship with FDI inflows including the moderating effects of environmental and regulatory quality which is the innovation in the FDI-Growth existing literature. Thus, policymakers are urged to prioritize environmental quality and regulatory quality, alongside other significant explanatory variables identified in this study to promote sustainable FDI inflows.