Foreign Direct Investment, Environmental Pollution and Economic Growth—An Insight from Non-Linear ARDL Co-Integration Approach

Abstract

The paper examines the impact of foreign direct investment and environmental pollution on economic growth in an emerging economy. We used annual data covering the period of 1986–2020 and the non-linear autoregressive distributed lag (NARDL) to analyze the positive and negative co-integrated variables, and our findings support the asymmetric relationship between foreign direct investment, environmental pollution and economic growth in both the short and long run, as well as a long-run relationship between environmental pollution and economic growth. A one-percent increase in environmental pollution leads to a positive change in economic performance by 0.662 percent. Adversely, a one-percent decrease in environmental pollution leads to a negative change in economic performance by 0.212 percent. Vietnam is an emerging market, and capital needs for economic activities are essential. However, the research results show that a disproportionate impact of foreign direct investment on economic growth is recorded in the long run, and a disproportionate impact of environmental pollution on the economy occurs in both the short and long term. Therefore, the government needs to have policies to attract foreign investment to develop a green and sustainable economy.

1. Introduction

Foreign direct investment (FDI) has been identified as an important source of financing for both developed and developing countries. Most countries have actively attracted FDI by creating important sources for doing business and economic development. FDI projects significantly affect competitiveness and investment climate by raising the productivity of capital [1]. In addition, FDI has statistically significant spillover effects on the host country in the light of raising the productivity of receiving firms or a firm in geographical proximity [2]. In fact, a local company can interact with its counterpart from foreign investors because of higher technology, innovation and productivity; therefore, the productivity transfer from the foreign firm to the domestic firm will occur. It is suggested that technological diffusion and innovation are crucial for almost all countries as well as providing a main source of capital along with technological diffusion which contributes to economic growth [3]. Furthermore, foreign investment also creates employment opportunities and enhances managerial skills and labor productivity, all of which promote economic performance. The host country needs to form a business climate for attracting every presence of foreign investment to contribute to economic growth in the long run [4].

Environmental protection is the practice of protecting and maintaining the natural environment, and environmental degradation needs to be repaired [5]. In the light of attracting foreign investment, environmental quality has been greatly damaged all over the world. As suggested in Sabir et al. (2020) [6], foreign investment brings low technology that can negatively impact the environment due to carbon and greenhouse gas emissions. According to the endogenous growth model, the technological factor can stimulate economic growth by generating negative effects that support economic growth. Therefore, the factor of technological quality has been considered as a major engine of stimulating economic growth.

Empirical investigations generally test the bidirectional impact of environmental degradation on economic growth. Countries are likely to increase foreign investment which contributes to economic growth by the entry of multinational corporations (MNCs) or transnational corporations (TNCs) into the host country, but this effect is varied and conflicting. The impact of FDI on economic growth is negative (Schoors and Tol 2002), but in the long run, the effect of FDI on economic growth is positive [7]. In the case of Vietnam, foreign direct investment is one of the most important factors in the economic development of the country. Along with the process of globalization, the role of foreign direct investment becomes more and more important. Specifically, FDI is playing an important role in providing capital and technology, expanding production scale, creating new production capacities and improving the competitiveness of Vietnamese enterprises in the context of global integration. In the era of globalization, where economic, trade and technological barriers are fading, developing countries focus on FDI due to its positive effects [8]. Although each country has its own characteristics and strengths to take advantage of when working in the direction of economy and growth, FDI still plays an essential role in the main factors that directly affect growth. FDI is the key to global economic integration, providing financial stability, promoting economic growth and improving social welfare [9,10]. In agreement with the positive aspects, there are also many negative aspects in the host country. For example, foreign companies often transfer outdated technologies via old machinery and equipment, causing damage to the ecological environment. In the long-term vision, prioritizing high-tech and environmentally friendly FDI projects is a key task for economic growth, compensating for the shortfall capital in the host countries by adding foreign capital, especially for less developed countries [10]. Thus, foreign investment along with environmental pollution has been considered as a main factor that affects economic growth. A strategic plan of countries to balance foreign investment and environmental protection in order to maximize economic performance and competitive abilities of the economies is important. Derived from the above practice, the article concludes that there is a long- and short-run relationship between environmental pollution and economic growth, while one can only find a short-run relationship between foreign investment and economic growth in the case of Vietnam.

This paper is structured as follows: Section 1 explains the objectives of the study. Section 2 discusses previous studies related to the relationship between either foreign direct investment or environmental pollution and economic growth. Section 3 introduces the data collection and research model, especially the NARDL model. Subsequently, the results and discussions are proposed in Section 4, and finally, Section 5 is for conclusions.

The study aimed to answer the following questions: Does the combination of foreign direct investment always have a positive or a disproportionate effect on economic growth? Does economic growth have to trade off with environmental pollution? Do direct investment and economic growth have effects on the economy in the short or long term? Regarding this relationship, the asymmetric relationship between FDI, environmental pollution and economic growth has not been analyzed in the case of Vietnam, while the country has opened its economy quite late and is likely to expand trade openness along with attracting foreign investment. Therefore, choosing a sample for a study of Vietnam will contribute to providing empirical evidence and a new model in the light of economic reforms and development in the country.

2. Literature Review

2.1. Foreign Direct Investment and Economic Growth

Foreign direct investment has significantly contributed an important source of capital necessary for economic development in both developed and emerging economies. As a part of global integration, developing and emerging economies have also come to rely on capital, especially those that take the form of every presence of foreign investment [11]. In fact, most economies lack capital for investment in order to create jobs and enhance their productivity, growth expansion and economic growth [11]. As suggested in Nguyen (2020) [12], FDI is normally undertaken by multinational companies or transnational companies, and it is often suggested to be the new source of capital in order to transfer its technology and know-how.

Although numerous empirical studies have been carried out to evaluate the relationship between FDI and economic growth, the results are conflicting [13]. Considering this relationship in India and its neighboring countries, Sengupta and Puri (2018) [13] indicated that FDI is an engine in enhancing economic growth, but the magnitude of the relationship is varied and reliant on the different economic policies of selected countries. Adversely, FDI can reduce capital accumulation when it claims scarce resources by crowding out investment from domestic firms. It is therefore concluded that FDI has a negative effect on economic growth in developing countries since a piece of capital in developing countries has a greater benefit than in developed countries [14].

The rationale behind the positive contribution of FDI to economic growth is that FDI can boost economic growth by stimulating capital accumulation and investment promotion through economic reforms, registration facilities, protection of investments and settlement of disputes. Hakizimala (2015) [15] concluded that a positive relationship between FDI and economic growth can be found. By this effect, Rwanda has greatly attracted FDI by supporting the investment climate to foreign investors through important reforms. Similarly, Sarker and Khan (2020) [16] also reaffirmed the role of FDI in promoting economic growth in Bangladesh. It is also argued that the effect of FDI on the GDP in the long run existed in the context of economic reforms in the 1980s and early 1990s resulting in the implementation of the program Structural Adjustment Policies (SAP) and Structural and Sectional Adjustment Loans (SAL and SECLs) in Bangladesh. A series of economic reforms and liberalization of trade and capital have had positive results in Bangladesh in the long run [17].

Dinh et al. (2020) [18] conducted a study on developing countries between 2000 and 2014 to assess long-term and short-term relations between FDI and economic growth. After using the error correction model (ECM) and fully modified OLS (FMOLS) for robustness check, the authors believed that the positive impact of FDI on economic growth in the long run and negative impact in the short run can be found. In addition, economic growth is also affected by a number of other macroeconomic factors such as money supply, quality of human resources, domestic investment and private credit in the long run. In some cases, the asymmetric effects of FDI and internal innovation in developing countries can exist, according to Asunka et al. (2020) [19]. It is evident that a reduction in FDI will significantly reduce internal innovation in developing countries, which is a sign that may reduce economic growth.

There have been several studies on the effects of FDI on economic growth in Vietnam. According to Nguyen (2016) [20] research conducted in Tra Vinh Province, using the vector autoregression (VAR) model, during the study period from 1993 to 2013, there is a positive impact of FDI on economic growth, but this impact is not yet prominent. Indeed, the impact of FDI on economic growth is only statistically significant and positive in the first period. However, the impact turns negative in the later periods due to the negative externalities of FDI projects on the environment, low technology and sustainable development. In addition, Nguyen and Nguyen (2021) [21] also confirmed a positive relationship between FDI and economic growth, including in the agricultural sector.

In recent decades, Vietnam has been classified as one of the highly open countries. Vietnam’s development is associated with the process of opening up its economy and high trade openness. Research by Hieu (2020) [22] assessed the relations between every presence of foreign investment and economic growth in the context of Vietnam’s trade expansion, arguing that foreign investment and exports are considered the main driving forces for economic growth, while imports have a negative impact on economic growth. To take full advantage of FDI, Hieu (2020) [22] believed that Vietnam needs to choose FDI investors with high technology, environmental friendliness and sustainable development. This finding is consistent with Nguyen and Nguyen (2021) [21]. Unfortunately, the studies of Nguyen and Nguyen (2021) [21] and Hieu (2020) [22] only used the OLS approach in a short research period, and therefore the research results are somewhat biased and do not fully reflect the short-term and long-term impacts. In recent times, scholars have not had a study on the asymmetric impact of FDI on economic growth. The study of Asunka et al. (2020) [19] only assessed the asymmetric impact of FDI and internal technological innovation. Similarly, the asymmetry between FDI and other factors such as carbon emissions [23,24] or international tourism [25] has also been investigated.

2.2. Environmental Pollution and Economic Growth

The relationship between environmental pollution and economic growth has been demonstrated in two ways. Environmental pollution has been considered a global issue. More recently, environmental pollution has included some major forms of pollution such as air pollution, electromagnetic pollution, light, noise, water, thermal and visual, plastic pollution and littering. Pollution may harm landscapes, poison soils and waterways and especially negatively affect humans. In addition, long-run exposure to environmental degradation can lead to cancers and other dangerous diseases. Along with harming humans, pollution can cause a variety of environmental effects such as global climate change, global warming, sea water rise, etc.

Environmental protection and high economic growth are goals for developing in numerous countries. Specifically, a country’s higher level of environmental quality is connected to a lower level of economic performance. It has always been a dilemma for countries to balance environmental protection and economic growth. Zaidi and Saidi (2018) [26] conducted a research study on Sub-Saharan African countries between 1990 and 2015, showing a causal relationship between environmental pollution and economic growth. In particular, in a crisis regime, most economies show their weaknesses. It could be a stock market crash, a significant change in inflation or employment, bank failures or economic depression. In the context of this situation, energy particularly has played a major role in economic development, while consumption of traditional energy sources such as fossil fuels has had a negative impact on the environmental quality. There is bidirectional causality between environmental quality and economic growth [27].

Considering the policy “grow now, clean later”, Rasool et al. (2020) [28] suggested that the association between environmental quality and economic growth is found in the case of India, and therefore, efforts to mitigate carbon dioxide emissions can constrain its economic growth. With a huge population, India has faced lots of difficulties in enhancing economic growth and poverty reduction. Although its economy is growing, poverty is still a major challenge. The number of poor people in the country was estimated at approximately 364 million in 2019 and accounted for 28 percent of the population [29].

In addition, environmental degradation has become a serious problem that makes economic growth uncertain. Chen (2015) [30], in a study on China, found an ecological development shock before 1992 and an enhancement as well as the peak in the period of 1990–2002, in agreement with the development of heavy industrialization. As suggested in Meadows et al. (1972 [31]), the appearance of modern ecological development started in industrialized countries in the 1960s, in which economic development became the main driver of pollution. Along with this trend, economic reforms in China in the 1970s made a significant contribution to economic growth in China. In addition, rapid industrialization has wrought intense levels of pollution that play a role in serious social, economic and political problems. Thus, China formally has become the second largest economy in the world.

In addition, climate change and global warming have increased pollution problems. In developed countries, environmental pollution has been continuously increasing due to economic activities and energy consumption. Basar and Tosun (2021) [32], in a study of 28 OECD countries covering the years from 1995 to 2015, found an inverted U-shaped relationship between environmental degradation and income, indicating that a greater awareness of environmental pollution fluctuations leads to a crucial impact on sustainable development. In fact, natural resources have had a remarkable impact on accelerating economic performance.

Nazeer et al. (2016) [33] pointed out that economic growth and pollution are positively correlated. Sustainable development can be connected to an increase in the socio-economic standard of living conditions. In addition, developed countries have numerous advanced technologies to combat environmental pollution and reduce risks of climate change. Therefore, the UN Sustainable Development Goals (SDGs) place a strong emphasis on reducing environmental pollution, for example, improving soil quality, clean energy and technologies. Pollution prevention is key to sustainability for future generations and achieving economic performance in the long run (Basar & Tosun, 2021).

China’s economic development has been rapid since China’s accession to the WTO in 2000 along with the rapid increase in environmental pollution; therefore, ensuring a balance between environmental protection and economic growth is the most important goal that should be considered. According to the research by [34] on 11 Western China’s cities from 1992 to 2010, it is evident that the environmental pollution index and GDP are interrelated. In fact, economic growth is the main cause of increasing environmental pollution, but environmental pollution is an important indicator to predict economic growth in the future. This is also consistent with the explanation by [35]: environmental pollution has an impact on the costs of economic and social welfare. These costs include deaths, health costs, productivity reduction and migration.

Environmental pollution is considered an external factor of economic growth, and it highly affects individuals, businesses and governments. Sun et al. (2021) [36] also affirmed that rapid economic growth is strongly related to resource depletion. Against this backdrop, countries such as China regulate their energy consumption, industrial production and pollution to reduce environmental costs to the economy. It implies that stimulating green growth and creating sustainable growth is an urgent need. Furthermore, the technology-led green growth model is a solution to mitigate environmental impacts [37]. Industrial upgrades and foreign direct investment are the main contributors to reducing harmful emissions into the environment, creating a mechanism to encourage production, investment and rapid economic growth [38].

Although there has been a number of studies on the impact of environmental pollution on economic growth, such as the studies by [26,27,28,32], the results of the studies are still inconsistent on the relationship between foreign direct investment, environmental pollution and economic growth. Most of the results show positive or negative effects of foreign direct investment and environmental pollution on economic growth. In recent studies, short-term and long-term asymmetry assessments have not been studied yet. This research gap was explored in this study.

3. Data and Methodology

3.1. Data

This study aims to investigate the foreign direct investment, environmental pollution (proxied by CO₂ emissions) and its impact on economic growth (proxied by gross domestic product per capita). The requirement of non-linear autoregressive distributed lag (NARDL) is the need for an efficient number of observations in order to perform the estimation. The scope of this study was the impact of foreign direct investment and environmental pollution on economic growth in the case of Vietnam, with the annual data collected from 1986 to 2020. More specifically, Vietnam’s gross domestic product, foreign direct investment and CO₂ emissions were derived from the World Bank’s World Development Indicators. LNFDI, LNEP and LNGDP, respectively, are considered as the logarithms of foreign direct investment net inflows, CO₂ emissions (kt) and gross domestic products per capita. The data sources and description are written in the following

Table 1. Data sources and description.

Variables	Variable Description	Unit of Measurement	Data Sources	Expected Relationship
FDI	Foreign direct investment	Logarithm	World Bank	Positive
EP	Environmental pollution	Logarithm	World Bank	Positive
GDP	Economic growth	Logarithm	World Bank

Source: Summarized by authors.

:

3.2. Empirical Model

The functional linear form in the model of this study can be written as below:

GDP = f(EP, FDI)

As discussed in the literature, time-series analysis can indicate the long-run and short-run relationships among variables, and it assumes that symmetric relationships exist. However, Shin et al. (2014) [39] demonstrated the NARDL by considering an asymmetric long-run regression:

$$Yt={\beta }^{+}Xt+{\beta }^{-}Xt+ut$$

Like other co-integration methods, the ARDL can be suitable for time-series data, which are stationary at the I(0), or I(1), or a combination of I(0) and I(1). In the case of the presence of I(2) time series, the method of the ARDL cannot be employed because of the invalid F-statistic value of the co-integration test. As suggested in Shin et al. (2014), $X_t$ can be decomposed into $X_t^{+}$ and $X_t^{-}$, indicating the positive and negative fluctuations in the growth rate of $X_t$. Accordingly, proposing the non-linear ARDL (p, q) model can be shown as follows:

$$Yt={\displaystyle \sum }_{k=1}^p{\varnothing }_k{Y}_{t-k}+{\displaystyle \sum }_{k=1}^q({\beta }_k^{+}{X}_{t-k}^{+}+{\beta }_k^{-}{X}_{t-k}^{-})+{\epsilon }_t$$

where:

• $X_t$ is a l × 1 vector of multiple regressors,
• $X_t=X_0+X_t^{+}+X_t^{-}$,
• ${\beta }_k$ is the autoregressive parameter,
• ${\beta }_k^{+},{\beta }_k^{-}$ are the asymmetric distributed lag parameters.

Considering the literature, the general ARDL equation in a linear relationship is normally indicated in the following form:

$$\mathsf{\Delta }GD{P}_t={\beta }_0+{\beta }_{1}GD{P}_{t-i}+{\beta }_{2}FD{I}_{t-i}+{\beta }_{3}E{P}_{t-i}+{\displaystyle \sum }_{i=1}^a{\beta }_{4}GD{P}_{t-i}+{\displaystyle \sum }_{i=1}^b{\beta }_{5}FD{I}_{t-i}+{\displaystyle \sum }_{i=1}^c{\beta }_{6}E{P}_{t-i}+{\epsilon }_t$$

where:

• ${\beta }_1, {\beta }_2, {\beta }_3$ indicate the long-run coefficients of the linear ARDL model,
• ${\beta }_4, {\beta }_5, {\beta }_6$, indicate the short-run coefficients of the linear ARDL model.

In the situation of the positive and negative parts co-integrated with each other, it is evident that long-run relations could exist. In this case, the non-linear co-integration regression of the relationship between foreign direct investment, environmental pollution and economic growth is shown as follows:

$$GD{P}_t={\beta }^{+}FD{I}_t^{+}+{\beta }^{-}FD{I}_t^{-}+{\beta }^{+}E{P}_t^{+}+{\beta }^{-}E{P}_t^{-}+{\epsilon }_t$$

The analysis is derived from partial sums of positive and negative fluctuations of foreign direct investment and environmental pollution in the presence of the following Equations:

$$FD{I}_t^{+}={\displaystyle \sum }_{i=1}^t”FD{I}_t^{+}={\displaystyle \sum }_{i=1}^t\max \left(“FD{I}_t,0\right)$$

$$FD{I}_t^{-}={\displaystyle \sum }_{i=1}^t”FD{I}_t^{-}={\displaystyle \sum }_{i=1}^t\min \left(“FD{I}_t,0\right)$$

$$E{P}_t^{+}={\displaystyle \sum }_{i=1}^t”E{P}_t^{+}={\displaystyle \sum }_{i=1}^t\max \left(“E{P}_t,0\right)$$

$$E{P}_t^{-}={\displaystyle \sum }_{i=1}^t”E{P}_t^{-}={\displaystyle \sum }_{i=1}^t\min \left(“E{P}_t,0\right)$$

To estimate the non-linear ARDL model of foreign direct investment, environmental pollution and economic performance based on [39], we have:

$$\mathsf{\Delta }GD{P}_t={\beta }_0+{\beta }_{1}GD{P}_{t-i}+{\beta }_{2}FD{I}_{t-i}^{+}+{\beta }_{3}FD{I}_{t-i}^{-}+{\beta }_{4}E{P}_{t-i}^{+}+{\beta }_{5}E{P}_{t-i}^{-}+{\displaystyle \sum }_{i=1}^a{\beta }_{6}GD{P}_{t-i}+{\displaystyle \sum }_{i=1}^b{\beta }_{7}FD{I}_{t-i}^{+}+{\displaystyle \sum }_{i=1}^c{\beta }_{8}FD{I}_{t-i}^{-}+{\displaystyle \sum }_{i=1}^b{\beta }_{9}E{P}_{t-i}^{+}+{\displaystyle \sum }_{i=1}^c{\beta }_{10}E{P}_{t-i}^{-}+{\epsilon }_t$$

where:

• ${\beta }_0$ is the intercept,
• ${\beta }_1, {\beta }_2, {\beta }_3$,${\beta }_4, {\beta }_5$ indicate the long-run coefficients of the non-linear ARDL model,
• ${\beta }_6, {\beta }_7, {\beta }_8$,${\beta }_9, {\beta }_{10}$ indicate the short-run coefficients of the non-linear ARDL model,
• ${\epsilon }_t$ is the error term.

4. Results

4.1. Descriptive Statistics

Table 2. Descriptive statistics.

Items	LNEP	LNFDI	LNGDP
Mean	11.133	21.043	6.445
Median	11.274	21.393	6.304
Maximum	12.243	23.528	7.980
Minimum	9.770	10.596	4.549
Std. Dev.	0.838	2.769	1.009
Skewness	−0.195	−2.082	−0.125
Kurtosis	1.534	7.540	1.981
Jarque–Bera	3.352	55.380	1.604
Probability	0.187	0.000	0.448
Sum	389.676	736.536	225.592
Sum Sq. Dev.	23.893	260.749	34.671
Observations	35	35	35

Source: Analyzed by authors.

summarizes the descriptive statistics of variables used in the study, including GDP, FDI and EP. As suggested by the Jarque–Bera test of normal distribution of data, EP and GDP are normally distributed, while there are negative skewness and high kurtosis in terms of FDI. The mean of LNEP is 11,274, LNFDI is 21,393 and LNGDP is 6304. Since the variables are all trend variables with no normal distribution, the deviation must be very high. The study converted these variables to the logarithm of the natural base so that the variable has a distribution close to the normal distribution, meeting the input data conditions of the model.

Table 3. Unit root tests.

Variables	Unit Root at Level I(0)	Unit Root at Level I(1)
Augmented Dickey–Fuller t-Statistic (p-Value)
LNEP	−4.452 (0.101)	−4.361 (0.0016) ***
LNFDI	−5.685 (0.000) ***
LNGDP	−2.869 (0.172)	−4.334 (0.001) ***
Phillips–Perron t-Statistic (p-Value)
LNEP	19.025 (0.000) ***
LNFDI	32.327 (0.000) ***
LNGDP	18.784 (0.000) ***

Notes: With significance level α = 0.05, if null hypothesis is accepted, the time series is not stationary; if null hypothesis is rejected, the time series is stationary. Then the augmented Dickey–Fuller and Phillips–Perron unit root test methods were applied to test the stationarity of the data series: lnEP, lnFDI and lnGDP, respectively. *** refer to level of significance of 1%. Source: Analyzed by authors.

presents the unit root test of our selected variables to check the stationarity of variables. Accordingly, lnEP and lnFDI are stationary at the original level, while lnGDP does not exhibit stationarity at the original level. A further test of the stationarity of lnGDP at the first difference had to be performed. Employing an augmented Dickey–Fuller test and Phillips–Perron test, we found that lnGDP is stationary at the first difference. Therefore, the order of co-integration of the series is a mixture of the level and first difference, that is, I(0) and I(1). The non-linear ARDL model is acceptable.

In addition,

Table 4. Bounds test co-integration results.

Model	F-Statistic	Upper Bound	Lower Bound
lnGDP/(lnFDI, lnEP)	19.333
Critical Value
0.1		3.09	2.2
0.05		3.49	2.56
0.025		3.87	2.88
0.001		4.37	3.29

Source: Analyzed by authors.

indicates the bound testing and non-linear estimation. The value of the F-statistic is greater than the tabulated values, which shows the non-linear long-run relationship between lnGDP, lnEP and lnFDI in the situation of Vietnam. The present examination proposes estimating the non-linear ARDL coefficients. Further,

Table 5. Asymmetric co-integration using bounds test.

Co-Integration Test Statistics:
F-statistic	4.724
t_BDM	4.524

Source: Analyzed by authors.

represents the result of non-linear co-integration among variables based on the F-statistic of Pesaran and t__BDM according to [40]. The null hypothesis is that there is no co-integration. The F-statistic value is greater than t__BDM, confirming that there is a long-run relationship between foreign direct investment, environmental pollution and economic performance. Thus, the long-run relationship could be further analyzed in the presence of non-linear co-integration estimation.

4.2. Results of Model

To evaluate the asymmetric impact of FDI and environmental pollution on economic growth, the Wald test was performed. The results in

Table 6. Long-run and short-run asymmetry tests.

Wald Test	Long-Run Asymmetry		Short-Run Asymmetry
	F-Stat	Sig.	F-Stat	Sig.
	WLR = 14.829	0.0023	WSR = 1.957	0.000
Conclusion	Asymmetry		Asymmetry

Source: Analyzed by authors.

show that $W_{LR}$ = 14.829 (with a corresponding probability value of 0.0023), which implies that the impact of FDI and EP on the GDP is asymmetric in the long run. Specifically, there is an asymmetric impact of environmental pollution on economic growth, while there is no asymmetric effect of FDI on the GDP in this study. It suggests that the positive and negative components of environmental pollution are consistent with economic performance in the long run with positive signs. More specifically, a one-percent increase in environmental pollution leads to a positive fluctuation in economic performance by 0.662 percent. Adversely, a one-percent decrease in environmental pollution leads to a negative fluctuation in economic performance by 0.212 percent. The findings are supported by the studies of [26] in Sub-Saharan African countries and [28] in India with its policy of “grow now, clean later”.

Additionally, the long-run impact of FDI on the GDP was not found. It means that either increasing or decreasing FDI does not affect the changes in economic growth. This study also found that a positive or negative component of environmental pollution has a negative and statistically significant correlation with economic growth in the short run. It implies that carbon dioxide emissions have a huge impact on economic growth in the short run, and a positive change in carbon dioxide emissions has a lower effect on economic growth as compared to a negative change in carbon dioxide emissions. This can be explained by that most developing countries are trying to increase their economic development instead of environmental protection in the short run, considering a huge population and numerous poor people, with the example of [28] in India with its policy “grow now, clean later”. India puts a huge effort to stimulate economic performance in the short run along with mitigating carbon dioxide emissions in the long run.

Similar to the short-term asymmetric relationship among variables, the results in Table 6 show that $W_{SR}$ = 1.957 (with a corresponding probability value of 0.000), indicating that the short-term asymmetric impact is also found in the case of Vietnam. Specifically, the short-run outcomes of this study also indicate that there is an asymmetric effect of every presence of foreign investment on economic growth. In addition, a positive/negative component of foreign investment has a negative/positive effect and is statistically associated with economic growth in the short run. It indicates that foreign investment does not really enhance economic growth in all cases.

In fact, along with the process of economic reforms, the National Assembly issued the Law on Foreign Investment on 29 December 1987, marking a turning point in attracting foreign investment into Vietnam. In addition, the FDI sector has increasingly contributed a huge added value to the country’s economic development in the form of spillover effects such as: promoting reform of administrative procedures and improving the business environment and human resources [41]. However, foreign firms have taken advantage of Vietnam’s cheap labor, and the localization and spillover effects have not changed significantly along with a low technology transfer [42].

As suggested in [43], Vietnam has been a member of the World Trade Organization (WTO) since 11 January 2007, which greatly impacts drawing foreign investment into the country. Along with joining WTO, Vietnam has considerable potential to attract more foreign direct investment in agreement with a strong agenda of economic reforms, especially making more free trade agreements (FTAs) with the giant partners worldwide [41]. Accordingly, FDI has significantly expanded in Vietnam, from USD 13 billion in 2007 up to USD 22.76 billion in 2015, reaching USD 28.53 billion in 2020. FDI has been one of the most important factors that turned Vietnam into a middle-low-income economy in 2011 and a middle-income economy in 2023–2024.

Unfortunately, after an impressive result of economic growth in the period of 1995–2006, economic growth has gradually decreased from 8.4% in 2005 to 6.7% in 2017. Due to the banking system’s bad debt crisis and slow economic reform, economic growth continuously dropped from 6.42% in 2010, down to 6.24% in 2011, 5.25% in 2012 and then slowly improved in the period of 2012–2015. In general, the average growth rate of the economy reached 5.91% in the whole period of 2011–2015 and much lower than the rate of 6.32% in the period of 2006–2020 and failed to achieve the planned economic growth target of 6.5–6% [44].

The estimated results in

Table 7. Dynamic asymmetric estimation of economic growth and long-run coefficients.

Variables	Coef.	Std. Err.	T-Statistic	Sig.
C	0.202	0.208	0.972	0.343
CointEq(−1) ***	−0.741	0.061	−12.104	0.000
GDP	−0.741	0.145	−5.082	0.000
EP_POS ***	0.662	0.207	−3.193	0.004
EP_NEG **	0.212	0.143	−1.482	0.015
FDI_POS(−1)	0.002	0.030	0.080	0.936
FDI_NEG(−1) *	−0.177	0.083	−2.126	0.046
D(GDP(−1))	−0.342	0.093	−3.681	0.001
D(GDP(−2)) ***	−0.174	0.034	−5.005	0.000
D(FDI_POS)	−0.022	0.032	−0.671	0.510
D(FDI_POS(−1)) ***	0.130	0.035	3.675	0.001
D(FDI_NEG) **	0.388	0.137	2.815	0.011
D(FDI_NEG(−1)) *	0.259	0.142	1.820	0.084
Adj R-squared	0.336
F-statistic	0.419
Ramsey RESET test	p-value = 0.4129
LM test	p-value = 0.1860
Breusch/Pagan heteroskedasticity test	p-value = 0.6338

Note: ***, **, * indicate significance level of 1%, 5%, 10%. Source: Analyzed by authors.

indicate that the coefficient of co-integration equals −0.741 at the 5% significance level. This implies that economic growth is able to adjust to long–term equilibrium after each short-term shock created by foreign investment and environmental pollution. This is consistent with [45] if the value is greater than 1 and lower than 2 (with a negative sign), it indicates that equilibrium will be adjusted in a dampening manner.

In order to check the significance in the study, the diagnostic statistics of NARDL are presented in Table 7. At this point, the criticalness estimation of the LM test and Breusch/Pagan heteroskedasticity test demonstrate that the model is free from autocorrelation and heteroskedasticity issues. Similarly, Ramsey’s RESET test is a general specification test, showing whether there exist any non-linear relationships. In this case, the corresponding probability value is greater than 0.05, reflecting that the model is well specified.

This study carried out a check of the stability of estimated parameters by employing CUSUM and CUSUMSQ as shown in Figure 1 and Figure 2. The figure affirms that CUSUM and CUSUMSQ are inside the critical lines at the level of significance of five percent, indicating that the model is stable and free from sudden shocks or structural breaks.

5. Conclusions

Foreign direct investment has played an important role in enhancing the country’s competitiveness. Starting the economic reforms in 1986, Vietnam has greatly attracted foreign investment in order to supplement capital in the country along with job creation, productivity diffusion and economic growth. The rationale behind the contribution of FDI to the economy is that FDI can stimulate economic growth by enhancing capital accumulation, protection of investment and investment climate. Using sample data covering the period of 1986–2020 and the advanced methodology based on the non-linear autoregressive distributed lag (NARDL) model, the research results demonstrate that the asymmetric relationship between foreign direct investment, environmental pollution and economic growth is found in both the short and long run.

• Specifically, there is an asymmetric effect of every presence of foreign investment on economic growth in the short run. In addition, there is a relationship between environmental pollution and economic growth in both the short and long run. The obtained empirical results are consistent with the expectation in Table 1 offered at first. Specifically, there is an asymmetric effect of every presence of foreign investment on economic growth in the short run.
• From the results of the paper, we propose some implications. The key policy implication of these results is that long-term economic growth in Vietnam depends on foreign direct investment, environmental pollution and harmonization of policies on FDI and EP. Moreover, policymakers should be cognizant of the short-run connections between the covariates. These results would be of particular interest to policymakers, working in developing countries such as Vietnam, and help them in design and development in order to attract FDI into the country with the direction of environmental protection, which could possibly be used for sustainable economic development.
• In future research, the authors will include some more economics factors in the study such as information and communication technology and trade openness [46] or transport and logistics [47,48]. In another direction, we will expand the area of countries, for example, Asian or Southeast Asian countries, for the same variables in this paper, with appropriate econometric models.