Foreign Direct Investment and Growth Impact on Pollution in the <scp>EU</scp> Countries: Empirical Analysis of the <scp>EKC</scp> and Pollution Halo Hypothesis

ABSTRACT Foreign direct investment inflows are an important factor in the development of countries. Rising FDI can cause unexpected environmental consequences by changing technology use or energy consumption. The study examined the relationships between fossil energy consumption, carbon emission rate, and FDI for 27 European Union countries in the period 2006–2021. In addition, for the first time in this study, EU countries were divided into two according to their income levels and re‐analysed. Panel data method and robust Driscoll and Kraay (1998) estimator were used in empirical analyses. The research findings show that a one‐unit increase in FDI across EU countries results in a 0.055% increase in GDP and fossil fuel consumption, respectively, and a −0.155% decrease in pollution. These results support the pollution halo hypothesis, which posits that foreign direct investment reduces environmental degradation. The research findings support the pollution halo hypothesis, which states that FDI reduces environmental degradation. It also confirms that the EKC hypothesis, which states that there is an inverted U‐shaped relationship between pollution and GDP, is valid in 27 EU countries. However, it has been determined that the pollution haven hypothesis is valid in low‐income EU countries. Low‐income EU countries should encourage more foreign investment in technology‐intensive and environmentally friendly areas and develop various environmental regulations in this direction. The results obtained from the research are expected to provide benefits and insights to policy makers, researchers, and industrialists to increase environmental awareness. The results suggest that low‐income EU countries should encourage technology‐intensive and environmentally friendly investments, improve green financing and investment conditions, and develop regulations to strengthen environmental standards, so that they can limit environmental degradation while preserving the general welfare‐enhancing benefits of FDI.