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FDI inflows remain an important source of economic growth and technology transfer for developing countries. However, the proponents of the pollution haven hypothesis (PHH) argue that FDI inflows may result in the production of polluted goods in poor economies. The empirical testing of PHH reveals conflicting outcomes on the subject. This study argues that foreign firms’ choice of specific technologies and hence the validity of PHH can be determined by host countries’ level of education. For developing economies having low levels of schooling, FDI inflows will accompany polluted technologies. Nonetheless, when education levels exceed certain thresholds, FDI inflows may reduce CO 2 emissions. For our empirical investigation, we rely upon a large panel of 108 developing countries during 2000–2016. Our estimated outcomes, based on the panel cointegration method and panel vector error correction methods (P-VECM), confirm these moderating effects of human capital in the FDI–CO 2 emissions nexus. The empirical results also confirm the presence of the environmental Kuznets curve (EKC) for developing countries. These results have important policy implications for the sample economies.

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There is considerable debate whether the domestic political institutions (specifically, the country's level of democracy) of the host developing country toward foreign investors are effective in establishing the credibility of commitments are still underway, researchers have also analyzed the effect of international institutions such as (GATT-WTO) membership and Bilateral Investment treaties (BIT) in their role of establishing the credibility of commitment to attract foreign investments. In addition, most recent studies have examined the effect of International Trade Agreements (TAs) on FDI flows as they contain separate investment chapters and dispute settlement mechanism, thus providing confidence to investor regarding the security of their investments. We argue that there are qualitative differences among various types of trade agreements and full-fledged trade agreements (FTA-CU) provide credibility to foreign investors and democracy level in the host country conditions this effect whereas the partial scope agreements (PSA) are not sufficient in providing credibility of commitments and not moderated by democracy. This paper analyses the impact of heterogeneous TAs, and their interaction with domestic institutions, on FDI inflows. Statistical analyses for 122 developing countries from 1970 to 2005 support this argument. The method adopted relies on fixed effects estimator which is robust to control endogeneity on a large panel dataset. The strict erogeneity of results by using a method suggested by Baier and Bergstrand (2007) and no feedback effect found in sample. The results state that (1) More the FTA-CU concluded, larger the amount of FDI inflows are attracted into the developing countries and PSA are insignificant in determining the FDI inflow; (2) FTA-CU are complementary to democratic regime whereas the conditional effect of PSA with democracy on levels of FDI inflows is insignificant.