EXAMINING THE ENVIRONMENTAL IMPLICATIONS OF FINANCIAL DEVELOPMENT, FDI, AND TECHNOLOGICAL INNOVATION: INSIGHTS FROM PAKISTAN

Abstract

One of the key solutions to achieving “sustainable development” in Pakistan is to narrow the divide between economic activities and environmental quality. This study investigates the dynamic influence of GDP, financial development, foreign direct investment, population density, renewable energy consumption, and technological innovation on environmental degradation in Pakistan from 1990 to 2020. ADF and Phillips Perron unit root tests confirmed the stationarity of variables with a mix of level and first difference. Moreover, the F-bounds test revealed the presence of cointegration in the model. By using the ARDL approach, the long-term estimates highlight the significant contribution of the aforementioned variables in shaping environmental outcomes. Key insights include the negative impact of GDP per capita and financial development on environmental degradation, emphasizing the importance of sustainable economic policies and efficient resource allocation. Additionally, technological innovation positively influences environmental degradation, underscoring the need for green innovation and clean technology adoption. The study also reveals the positive linkage between population density and environmental degradation, emphasizing the importance of sustainable urban planning. Lastly, renewable energy consumption negatively affects environmental degradation, underscoring the significance of transitioning to renewable energy sources. The error correction model showed the presence of convergence, which confirmed short-run equilibrium. Granger causality showed mixed unidirectional and bidirectional linkages of carbon emissions with each independent variable. Based on these findings, policy recommendations include promoting sustainable economic development, strengthening the financial sector's focus on eco-friendly investments, fostering green innovation, implementing sustainable urban planning strategies, and encouraging renewable energy adoption.