Foreign direct investment and manufacturing CO₂ emissions in ASEAN

Type of the article: Research ArticleAbstractThis study examines how foreign direct investment (FDI) has affected manufacturing carbon emissions in eight ASEAN economies from 2005 to 2022 using panel data from the World Bank and UNCTAD and employing random effects and feasible generalized least squares estimators. The preferred specification indicates that a 1 percentage point increase in manufacturing-adjusted FDI inflows (as a share of GDP) is associated with a 0.018-unit rise in log manufacturing CO₂ emissions (approximately 1.8%). Simultaneously, population size (coefficient ≈ 0.94) and fossil fuel energy consumption (coefficient ≈ 0.053) exert strong positive and statistically significant effects. By contrast, per capita income and its squared term are not significant, providing no support for a Kuznets type nonlinear income-emissions relationship, and lagged emissions add little once contemporaneous drivers and error structures are controlled for. The results suggest that FDI has primarily flowed into emissions-intensive manufacturing activities, with limited evidence of broad-based clean technology transfer, thereby risking a lock-in of carbon-intensive development that undermines ASEAN’s Net Zero ambitions and intergenerational equity. The paper argues that tighter environmental standards for FDI, an accelerated energy transition away from fossil fuels, and integrated population planning is needed to reconcile manufacturing-led industrial expansion with sustainability goals in ASEAN. It also offers sector specific evidence to guide FDI governance and energy policy in middle-income countries.