The impact of eco-innovations, FDI, and financial development on environmental sustainability

Abstract

While extensive research has explored the nexus between eco-innovations, financial development, foreign direct investment (FDI), and the ecological footprint (EFP), studies focusing specifically on Saudi Arabia—an oil-dependent economy where the Pollution Halo or Heaven effects are particularly relevant—remain limited. This study investigates the impact of eco-innovations, financial development, FDI, and clean energy on environmental quality (measured by EFP) in Saudi Arabia over the period 1995–2022, employing the autoregressive distributed lag (ARDL) model. The results indicate that eco-innovations and clean energy contribute to reducing environmental degradation, whereas financial development exacerbates it. Moreover, FDI improves environmental conditions by lowering EFP, providing evidence of the Pollution Halo effect in the Saudi context. Robustness checks, including alternative estimators, confirm the stability of these findings. Furthermore, the Granger causality analysis reveals a unidirectional causal flow from all explanatory variables to EFP, except for renewable energy. Based on these results, the study proposes several policy implications to help mitigate and manage environmental challenges in Saudi Arabia.