Assessing the Role of Trade Openness, FDI, and Political Stability on Sustainable Development: Evidence From Developed and Developing Economies

1. Introduction

Globalization has rapidly changed the world over the past few decades. It is a major economic factor that is synonymous to imports and exports (Gurgul & Lach, 2014). With increased industrialization across nations, impetuous production and consumption, the non-renewable natural resources have been under enormous pressure. The repercussion of such rapid growth has been on the environment which has led to dismaying problems like global warming, ozone layer depletion, biodiversity loss, unequal distribution of wealth etc., which if not checked now, would result in irreparable damages for the future generations. This has raised the importance of sustainable development goals as postulated by the United Nations. Sustainable Development Goals have become imperative with the agenda of sustainable development getting penetrated into not just the government initiatives but also every business, institutions, and other such bodies both public and private. Thus, sustainable development goals have become the centre of policy actions.

With nations across the world, both developed and developing, in their pursuit of growth are getting increasingly industrialized which in turn results in long term implications on the environment. Trade policies across the nations remain a focal point as it has both direct and indirect implications on sustainable development. Sustainable development being the objective of WTO at the Doha Round, focuses on opening world trade while focusing on removing environmentally harmful trade distortionary measures and promoting greater access to environment friendly goods and services. Also, as per both WTO and the World Bank, there is a considerable association between international trade and sustainable development. Many initiatives and programs have been launched by both these organizations that aim to devise trade strategies that could result in economic growth at the same time safeguard the environment for future generations (Balassa, 1986; Weiss, 1992; Chandia et al 2018). With increased international trades opening up, there also has been an increased flow of capital to both developed and developing nations in the form of the FDI.

FDI often results in win-win situations to both the host and the foreign country as it results in innovation, technology transfer, and a host of other economic and non-economic benefits. Both developed and the developing economies have adopted carefully crafted economic reforms and restructured their economies to attract more FDI. There are various factors that have an impact on how much FDI a country would draw. Changing global economic situations, policy changes, political environment, trade openness, political stability, exchange rate, market potential, etc., are few of the factors which have an impact on FDI decisions.

Trade openness and FDI are regarded as the catalyst for rapid economic growth (Mohammed and Ruslee, 2015). As per the international economic theory and policy, the trade openness and foreign direct investment leads to economic growth (Kong et al., 2021; Cheng et al 2021). There are several definitions for trade openness and one of the most common and convenient definitions is that it is the sum of imports and exports normalized by the Gross Domestic Product (Adow and Tahmad 2018; Zaman et al. 2018; Ho et al. 2013). Trade openness and FDI are advantageous to host countries as they expose them to innovative ideas that result in resource utilization which in turn results in optimum returns in the form of economic growth (Ciobanu, 2021).