Asymmetric effects of Trade Openness, Foreign Direct Investment and Climate Change in Philippines’ Manufacturing Industry: Evidence from a non-linear ARDL approach

Abstract

This study examines asymmetric short-run and long-run effects of trade openness and foreign direct investment (FDI) on environmental degradation in the Philippine manufacturing sector using annual time series data spanning 1986–2023. Carbon dioxide (CO₂) emissions are employed as the dependent variable to capture environmental quality. To account for potential nonlinearities and asymmetric adjustments, the study adopts the nonlinear autoregressive distributed lag (NARDL) framework. The results confirm the existence of asymmetric cointegration among CO₂ emissions, trade openness, FDI, manufacturing activity, and economic growth. In the short run, positive shocks to trade openness and FDI increase CO₂ emissions, while negative shocks exert stronger contractionary effects on emissions. In the long run, negative shocks to trade openness significantly reduce CO₂ emissions, whereas positive shocks are statistically insignificant, indicating asymmetric environmental responses to trade expansion and contraction. Similarly, contractionary shocks to FDI reduce emissions more strongly than expansionary shocks increase them. These findings highlight that the environmental effects of trade openness and FDI are nonlinear and asymmetric, validating the use of the NARDL approach. The study highlights the importance of environmentally conditioned trade and investment policies, green technology-oriented FDI, and strengthened environmental regulations within the manufacturing sector.