Multilateral environmental agreements and the growth of total factor productivity in developing countries: evidence from the foreign direct investment channel

Reducing the level of climate change and its effects on social, economic and environmental spheres is a key condition to achieve sustainable development goals in developing countries. This paper aims to analyse the effect of stringent environmental policy on the sustainable creation of wealth in developing countries. It focuses on the effect of multilateral environmental agreements on total factor productivity growth. An empirical analysis is conducted on panel data using a sample of 74 countries between 1995 and 2017. A quadratic regression is performed on a fixed-effects panel model, as well as on a Durbin spatial panel model using ordinary least squares, two-stage least squares and maximum likelihood. The results obtained show that MEA has a positive nonlinear short-term effect and a negative long-term effect on the growth of TFP in DCs. However, the long-term marginal effect increases with the foreign directs investments net inflows. Moreover, the results indicate that the spatial interdependencies between DCs are such that the participation of one DC in MEA favours the growth of TFP of its neighbouring countries. The paper also finds that the effect of MEA on the growth of TFP decreases with the country level of development, while this effect is greater in African and Latin America countries than in Asian and European developing countries. It is therefore recommended that developing countries join MEAs while improving their attractiveness to FDI through the improvement of the institutional framework and the promotion of good governance.