An empirical investigation of financial development and ecological footprint in South Asia: Bridging the EKC and pollution haven hypotheses

This research explores the dynamic relationships between ecological footprint, economic performance, financial development, energy usage, and foreign direct investment (FDI) in South Asian economies utilizing the panel data from 1971 to 2018. In panel data analysis, conventional methods generally ignore the issues of cross-sectional dependency and the heterogenous nature of cross-sectional units. The other concern with the existing research is that most of the studies ignore the significance of ecological footprint while evaluating financial development and FDI as sources of environmental changes. The long-term relationship among the indicators is tested utilizing the Westerlund cointegration test. The findings support both environmental Kuznets curve and pollution haven hypotheses for South Asian economies. Besides, the empirical findings suggest that financial development increases environmental conservation while energy usage substantially disrupts the environment of the selected south Asian nations. Additionally, the heterogeneous causality analysis reveals the causal relationships between the variables. Thus, overall results recommend that the South Asian economies need to boost economic growth without compromising the environment, decrease fossil fuel usage, enhance financial sector growth and incentivize environmentally friendly FDI to conserve the environment in the region.