The Dynamic of Economic Growth, Manufacturing, FDI, and Carbon Emissions: A Vector Error Correction Model Analysis
DOI:
https://doi.org/10.70716/emis.v4i3.790Keywords:
carbon emission, economic growth, manufacturing, vector error correction modelAbstract
By increasing environmental issues related to climate change, there is a need for studying the impacts of economic growth, manufacturing, and foreign direct investments on carbon emissions in rapidly growing countries such as Indonesia. This paper studies the dynamic impacts of economic growth, manufacturing, FDI, and carbon emissions in the period of 1994-2023 using Vector Error Correction Model (VECM). Unit root, cointegration and Granger causality tests are used in this paper to investigate both equilibrium relationships and dynamic impacts. The findings of this paper show the existence of significant cointegration relationship among the variables. Economic growth negatively affects carbon emissions in both the short and long run, which shows that economic growth leads to better environmental conditions. On the other hand, manufacturing positively affects carbon emissions in both the short and long runs, and FDI has a positive effect on carbon emissions in both the periods, which suggests that the growth of industries and FDI is still being done in carbon-intensive sectors. These findings suggest that sustainable economic growth requires greening of industries and strict environmental policies.
References
Adekunle, I. A., Taiwo, S., Uwilingiye, J., & Aworinde, O. (2026). Does FDI turn ‘Dirtier’ at higher growth levels? Evidence from non-linearities and threshold effects. Energy Policy, 216, 115419. doi:https://doi.org/10.1016/j.enpol.2026.115419
Ahmed, M., Huan, W., Ali, N., Shafi, A., Ehsan, M., Abdelrahman, K., . . . Fnais, M. S. J. S. (2023). The Effect of Energy Consumption, Income, and Population Growth on CO2 Emissions: Evidence from NARDL and Machine Learning Models.
Akbar, M., Ridho, M., Pranata, D., Alfarizi, & Sakuntala, D. (2025). Analysis of the Economic Growth Gap in 2025 (Case Study of Developed Countries Vs Developing Countries). Indonesian Journal of Entrepreneurship and Startups, 3, 11-20. doi:10.55927/ijes.v3i1.13557
Avenyo, E. K., & Tregenna, F. (2022). Greening manufacturing: Technology intensity and carbon dioxide emissions in developing countries. Applied Energy.
Bulus, C., & Koc, S. (2021). The effects of FDI and government expenditures on environmental pollution in Korea: the pollution haven hypothesis revisited. Environmental Science and Pollution Research, 28, 1-16. doi:10.1007/s11356-021-13462-z
Churchil, S. A., Inekwe, J., Ivanovski, K., & Smyth, R. (2018). The environmental Kuznets curve in the OECD: 1870–2014. Energy Economics, 75, 389-399. doi:10.1016/j.eneco.2018.09.004
Destek, M. A., & Sarkodie, S. A. (2019). Investigation of environmental Kuznets curve for ecological footprint: The role of energy and financial development. Science of The Total Environment, 650, 2483-2489. doi:https://doi.org/10.1016/j.scitotenv.2018.10.017
Dogan, E., & Seker, F. (2016). Determinants of CO2 emissions in the European Union: The role of renewable and non-renewable energy. Renewable Energy, 94, 429-439. doi:https://doi.org/10.1016/j.renene.2016.03.078
Esmaeili, P., Balsalobre Lorente, D., & Anwar, A. (2023). Revisiting the environmental Kuznetz curve and pollution haven hypothesis in N-11 economies: Fresh evidence from panel quantile regression. Environmental Research, 228, 115844. doi:https://doi.org/10.1016/j.envres.2023.115844
Fokianos, K., Fried, R., Kharin, Y., & Voloshko, V. (2022). Statistical analysis of multivariate discrete-valued time series. Journal of Multivariate Analysis, 188, 104805. doi:https://doi.org/10.1016/j.jmva.2021.104805
Giannone, D., Lenza, M., & Primiceri, G. E. (2015). Prior Selection for Vector Autoregressions. The Review of Economics and Statistics, 97(2), 436-451. doi:10.1162/REST_a_00483 %J The Review of Economics and Statistics
Guay, A., & Pelgrin, F. (2023). Structural VAR models in the Frequency Domain. Journal of Econometrics, 236(1), 105466. doi:https://doi.org/10.1016/j.jeconom.2023.04.009
Hoa, P. X., Xuan, V. N., & Thu, N. T. P. (2024). Factors affecting carbon dioxide emissions for sustainable development goals – New insights into six asian developed countries. Heliyon, 10(21), e39943. doi:https://doi.org/10.1016/j.heliyon.2024.e39943
Khan, I., Hou, F., Zakari, A., Irfan, M., & Ahmad, M. (2022). Links among energy intensity, non-linear financial development, and environmental sustainability: New evidence from Asia Pacific Economic Cooperation countries. Journal of Cleaner Production, 330, 129747. doi:https://doi.org/10.1016/j.jclepro.2021.129747
Marques, A., & Caetano, R. (2020). The impact of foreign direct investment on emission reduction targets: Evidence from high- and middle-income countries. Structural Change and Economic Dynamics, 55. doi:10.1016/j.strueco.2020.08.005
Miah, M. D., Islam, M. S., & Raihan, A. (2025). Dynamic impact of economic growth, energy use, foreign direct investment and population on greenhouse gas emission in Bangladesh. Innovation and Green Development, 4(4), 100259. doi:https://doi.org/10.1016/j.igd.2025.100259
Nguyen, T. H. P., Vu, T. T., Vu, T. A., & Le, H. P. (2026). The effects of FDI and energy consumption on economic growth, environmental degradation, and sustainable development: Global evidence. Environmental Challenges, 24, 101576. doi:https://doi.org/10.1016/j.envc.2026.101576
Oprea, S., Adela, B., & Georgescu, I. (2025). Investments, Economics, Renewables and Population Versus Carbon Emissions in ASEAN and Larger Asian Countries: China, India and Pakistan. Sustainability, 17. doi:10.3390/su17146628
Pradhan, A., Sachan, A., Sahu, U., & Mohindra, V. (2021). Do foreign direct investment inflows affect environmental degradation in BRICS nations? Environmental Science and Pollution Research, 29. doi:10.1007/s11356-021-15678-5
Qamri, G. M., Sheng, B., Adeel-Farooq, R., & Alam, G. M. (2022). The criticality of FDI in Environmental Degradation through financial development and economic growth: Implications for promoting the green sector. Resources Policy, 78, 102765. doi:10.1016/j.resourpol.2022.102765
Qiao, R., Liu, X., Gao, S., Liang, D., GesangYangji, G., & Xia, L. (2024). Industrialization, urbanization, and innovation: Nonlinear drivers of carbon emissions in Chinese cities. Applied Energy.
Singhania, M., & Saini, N. (2021). Demystifying pollution haven hypothesis: Role of FDI. Journal of Business Research, 123, 516-528. doi:https://doi.org/10.1016/j.jbusres.2020.10.007
Surya, B., Menne, F., Sabhan, H., Suriani, S., Abubakar, H., & Idris, M. (2021). Economic Growth, Increasing Productivity of SMEs, and Open Innovation. Journal of Open Innovation: Technology, Market, and Complexity, 7(1), 20. doi:https://doi.org/10.3390/joitmc7010020
Wencong, L., Kasimov, I., & Saydaliev, H. B. (2023). Foreign direct investment and renewable energy: examining the environmental Kuznets curve in resource-rich transition economies. Renewable Energy.
Xu, B., & Lin, B. (2016). Reducing carbon dioxide emissions in China's manufacturing industry: a dynamic vector autoregression approach. Journal of Cleaner Production, 131, 594-606. doi:https://doi.org/10.1016/j.jclepro.2016.04.129
Yamaka, W., Phadkantha, R., & Rakpho, P. (2021). Economic and energy impacts on greenhouse gas emissions: A case study of China and the USA. Energy Reports, 7, 240-247. doi:10.1016/j.egyr.2021.06.040
Yang, M., Wang, E.-Z., & Hou, Y. (2021). The relationship between manufacturing growth and CO2 emissions: Does renewable energy consumption matter? Energy, 232, 121032. doi:https://doi.org/10.1016/j.energy.2021.121032
Downloads
Published
Issue
Section
License
Copyright (c) 2026 Dodi Tirtana, Tiara Pradani, Galih Nugraha, Fitrah Sari Islami (Author)
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
