A novel perspective on environmental quality: Exploring load capacity factors through FDI inflows across diverse sectors - Empirical evidence from Türkiye

Climate change represents a severe threat not only to natural habitats but also to humankind in recent decades. Considering this, the underlying reasons for climate change have been extensively studied in the literature. It has been found that there is a positive relationship between economic activities and environmental degradation. As an essential component of economic activities, the effect of foreign direct investment (FDI) on environmental quality is a subject that has recently attracted researchers' attention. The existing studies focus on the impact of overall FDI inflows on environmental destruction; there are no studies considering the effect of FDI inflows in specific sectors on environmental quality. Within this context, the purpose of this study is to fill the gap and contribute to the literature by examining the effect of FDI flows into the primary, manufacturing, and service sectors on environmental degradation. This will be achieved by employing the Autoregressive Distributed Lag (ARDL) model over the period 1992-2018 in Türkiye. The outcomes of the study indicate that FDI flows in the service sector have a positive effect on environmental quality in both the short and long run in Türkiye. On the other hand, FDI in the manufacturing sector contributes to environmental degradation in both terms. Similarly, FDI flows into the primary sector have a reverse effect on environmental quality, but a significant effect in the short run has not been observed. Furthermore, this study also examines if there is a U-shaped relationship between income and the load capacity factor, termed the Load Capacity Curve (LCC) hypothesis. The results demonstrate that the validity of the LCC hypothesis is confirmed in Türkiye.