The criticality of exports sophistication and CO2 emissions: A new path towards sustainable environmental management

Abstract

This study investigates the relation between exports sophistication and CO₂ emissions, with particular attention paid to how foreign direct investment moderates them in Asian economies from 1995 to 2020. This study investigates the influence of exports sophistication, which measures productivity and income associated with an export basket, on environmental quality. Utilizing a two-step Generalized Method of Moments (GMM), we found that exports sophistication has an inverted U-shaped relationship with CO₂ emissions. At first, an increase in exports sophistication increase CO₂ emissions due to scale effect; but beyond a certain threshold point, further increases in exports sophistication result in lower emissions as economies shift away from dirty production technologies towards cleaner ones. This research underlines foreign direct investment as an influential force that affects environmental outcomes. While foreign direct investment contributes to economic growth, research suggests it may delay the point at which export sophistication begins to reduce emissions, supporting the pollution haven hypothesis in which developing nations receive investments with potentially detrimental environmental consequences. Further, foreign direct investment and exports sophistication interactions intensify CO₂ emissions, suggesting that without stringent environmental regulations foreign direct investment contributes to pollution. This evidence emphasizes the necessity of policies which support clean technologies and invest responsibly for economic growth with sustainability in mind.

Keywords: Asian economies; CO(2) emissions; Clean technology; Environmental quality; Exports sophistication; Foreign direct investment.