Abstract

Ethiopia has emerged as a top destination for Chinese foreign direct investment (FDI) in Africa, yet the environmental implications remain inadequately understood. This study investigates the impact of Chinese FDI on carbon (CO₂) emissions in Ethiopia from 1991 to 2024, employing an autoregressive distributed lag (ARDL) bounds testing approach. We further examine the moderating role of institutional quality in shaping the FDI-emissions nexus. Results reveal a positive and statistically significant long-run effect of Chinese FDI on CO₂ emissions (β = 0.0571), providing empirical support for the Pollution Haven Hypothesis (PHH) in the Ethiopian context. However, institutional quality exerts a negative and significant moderating effect (β = -0.2384), suggesting that improved governance can substantially reduce the environmental burden of FDI. Toda-Yamamoto causality tests confirm unidirectional causality from Chinese FDI to CO₂ emissions, with no evidence of reverse causality. Control variables—energy consumption, industrialization, and economic growth—also exhibit significant positive effects on emissions. We conclude that Chinese FDI contributes to environmental degradation in Ethiopia, though this effect is mitigated by stronger institutional quality; thus, policies should prioritize enhancing environmental governance and regulatory enforcement to curb the ecological costs of investment-led growth.

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