The impact of investment on environmental quality: evidence from Indonesian Provinces

The impact of foreign direct investment (FDI) on environmental degradation has been a main issue in investment-environment nexus. FDI that is channelled to non-eco-friendly industry most likely will accelerate environmental degradation. In this research, we focus on investigating the effect of FDI on environmental degradation by studying FDI in Indonesia across provinces. We use two proxies of environmental degradation which are Environmental Quality Index and Air Quality Index to measure the severity of air polution in each province. A panel data technique is applied to a panel of 34 provinces resulting in 164 observations province-year observations employed in the empirical estimation. We also disentagle investment as the main explanatory variable, not only FDI but also domestic investment. Our result show that both domestic investment and FDI are positively associated with environmental degradation implying that most of these invesment are channelled into the sector with high negative externalities resulting the decline of environmental quality in particular province.