POLLUTION HALO EFFECT IN NIGERIA: FOREIGN DIRECT INVESTMENT AND ENVIRONMENTAL QUALITY IN THE CONTEXT OF ENERGY DEPENDENCE AND INSTITUTIONAL GOVERNANCE

Abstract

This study examines the dynamic relationship between foreign direct investment (FDI) and environmental quality in Nigeria from 1980 to 2023, with particular attention to the moderating roles of institutional quality and nonrenewable energy consumption. Employing a novel Dynamic Autoregressive Distributed Lag (D-ARDL) simulation model, the study investigates both long-run equilibrium relationships and short-run dynamics among the variables. The findings reveal that FDI exerts a negative and statistically significant long-run effect on CO₂ emissions, providing robust empirical support for the pollution-halo hypothesis in the Nigerian context. Nonrenewable energy consumption emerges as the strongest driver of environmental degradation, exhibiting positive effects in both short-run and long-run. Institutional quality demonstrates a direct mitigating influence on emissions, though its moderating effect on FDI's environmental impact remains statistically insignificant. Notably, the long-run interaction terms between FDI and institutional quality, as well as between FDI and nonrenewable energy consumption, are statistically insignificant, suggesting that the environmental benefits of FDI operate directly through technology transfer mechanisms rather than through institutional moderation. The error correction term confirms rapid adjustment speed, with 72-80% of short-run deviations corrected within one period. The study contributes to the ongoing debate between pollution-haven and pollution-halo hypotheses by demonstrating that FDI's environmental benefits in Nigeria operate through direct technology transfer mechanisms. These findings carry significant policy implications for Nigeria's green growth strategy and sustainable development pathways.