Can Digital Economy Imports Reduce the Environmental Costs of Foreign Direct Investment? Evidence from Developing Economies

Abstract

This study investigates whether digital economy imports can mitigate the environmental costs of foreign direct investment (FDI) in developing economies. While FDI typically increases carbon emissions, particularly in countries with weak infrastructure and limited technological capabilities, digital imports can provide a compensatory mechanism by enhancing energy efficiency, facilitating the diffusion of green technologies, and strengthening environmental regulations. Our contribution lies in shifting the focus from domestic “digitalization levels” to cross-border digital absorption as a moderating factor in environmental relations. Furthermore, this paper proposes a compensation mechanism for developing countries’ digital economy imports, explaining how they can mitigate environmental costs associated with FDI by alleviating structural constraints such as inadequate infrastructure and limited technological capabilities. The findings indicate that while FDI inflows exacerbate carbon emissions, digital economy imports play a new moderating role by addressing structural deficiencies in developing economies. This study advances the debate on FDI and the environment, revealing the short-term environmental value of digital economy imports.