Political Corruption, Foreign Investment and Industrial Environmental Performance: Developing Countries' Perspective

ABSTRACT The debate on the environmental impact of foreign direct investment (FDI) continues to evolve; however, it is widely shown that FDI worsens environmental pollution in developing countries due to their institutional deficiencies. Currently, there is limited evidence on the synergistic effect of political corruption, which is corruption across the executive, legislature and judiciary, and FDI on industrial environmental performance in developing countries. This study, therefore, addresses this research gap by investigating the impact of political and public sector corruption and FDI on industrial environmental performance, measured by industrial carbon emissions, relying on a panel dataset from 112 developing countries for the period 1980–2022. Contrary to the pollution‐haven hypothesis (PHH), our results demonstrate that FDI flows to developing countries are significantly associated with a reduction in industrial emissions. Also, a higher level of public sector corruption and overall political corruption, especially executive corruption, significantly leads to higher industrial emissions, while less judicial and legislative corruption lessens industrial emissions. Also, contrary to the dominant view based on PHH, our results demonstrate that FDI reduces industrial emissions in developing countries with higher political and public sector corruption; however, FDI has a weak effect on industrial emissions in developing countries with less political and public sector corruption. These findings are important as they provide contradictory evidence to the widely held view that FDI flows to developing countries worsen environmental pollution due to their institutional deficiencies.