Heterogeneous Spillover Effects: How <scp>FDI</scp> in Resources Extraction, Manufacturing, and Services Affect Sectoral Carbon Emissions in the <scp>MENA</scp> Region

ABSTRACT The MENA region faces a critical challenge: balancing economic growth spurred by foreign direct investment (FDI) with environmental sustainability. While FDI can bring technological advancements and capital, concerns exist about its potential to exacerbate environmental degradation, particularly carbon emissions. This study addresses this knowledge gap by investigating the environmental consequences of disaggregated FDI inflows (resource extraction, manufacturing, and services) on emissions from various economic sectors in the MENA region from 1990 to 2022 by employing the system generalized method of moments to test the “pollution haven” and “pollution halo” hypotheses at both aggregate and sectoral levels. Our findings reveal that, at the aggregate level, total FDI reduces economy‐wide and tertiary sector emissions, primarily due to services FDI promoting clean technologies and structural transformation, supporting the “pollution halo” hypothesis. However, a disaggregated analysis shows that resource extraction and manufacturing FDI increase emissions across all sectors by expanding pollutive production and outsourced activities, aligning with the “pollution haven” effect. Conversely, services FDI consistently decreases emissions across all sectors, enhancing environmental quality and conforming to the “pollution halo” hypothesis. These insights hold policy significance for targeted incentives: promote clean services FDI while regulating resource extraction and manufacturing flows to balance economic growth and environmental sustainability. By investigating FDI's disaggregated effects, this study refines our understanding of environmental impacts and informs tailored policy strategies in the MENA region.