1. Introduction
Due to foreign direct investment (FDI) advantages, emerging economies, transitional countries, and developing countries have all liberalized their FDI policies and implemented best practices to attract investors [
1]. The host nation may benefit from FDI in several ways, including technology spillovers, support with human capital creation, a better business environment, a higher contribution to international trade integration, and a boost to firm growth. Beyond the apparent financial benefits [
2,
3], FDI may also improve the host country’s social and environmental conditions by promoting “cleaner” technologies and more socially conscious corporate practices. FDI is an integral aspect of globalization and the global economy because it fosters the production of new goods and services, it improves existing ones, and expands economies worldwide [
4,
5]. Moreover, it allows low-income countries to make up for their lack of resources, such as money for development, trade, investment, and taxes [
6,
7]. FDI ignited economic development through human capital development [
8,
9], technological advancement [
10,
11], domestic capital formation [
12,
13,
14,
15,
16], trade liberalization, and financial efficiency [
17,
18]. FDI supports nations in transforming agro-based economies into modern economies through industrialization. FD, additionally, expands the economic cash flow accumulation by capitalizing the investment opportunities, economic resources optimization and mitigation of trade imbalance [
1]. Furthermore, FDI has a disproportionately large direct effect on both the potential benefits of FDI and the pace of economic growth [
9]. Foreign investment is useful for emerging nations because it hastens the pace of agricultural modernization and rejuvenates it. The nation, as a whole, benefits via more trade and a higher ability to transform raw resources into finished goods.
Referring to the determinants of the FDI inflows, in the literature, a growing number of researchers have implemented and revealed a list of micro and macro fundamentals that are responsible for encouraging foreign investors to mobilize foreign capital [
6,
19]. For example, Mahbub, et al. [
20] highlight that institutional quality, clean energy, and access to financial services prompt the inflows of FDI in Bangladesh. Additionally, environmental regulation and access to established industrial facilities entice foreign investors for capital transfer, in the long run. Daude and Stein [
21] examine the institutional quality’s impact on FDI and expose a positive tie between them. The study suggests that governmental effectiveness and the protection of investor rights motivate foreign capital flows.
In this study, we considered the technological innovation (hereafter TI), financial innovation (hereafter FI), and environmental innovation (hereafter EI) in the equation of FDI. Increasing the capacity of technological developments is essential to the acquisition of renewable energy sources, the improvement of energy efficiency, and the decrease of carbon dioxide emissions. All of these factors can contribute to environmental sustainability, which eventually leads to the persistence in inflows of FDI [
22,
23]. Financial efficiency and efficient intermediation picturized the overall financial system performance, indicating access to financial institutions in the host economy where foreign investors seem to mobilize capital and technology; they prefer efficient financial channels with effective participation from FIs. The absorbing capacity in financial institutions is characterized by the firms’ adaption and diffusion of innovative financial products and services. Financial innovation in the financial system expands the financial institutions’ capacity and scope regarding the service offering in the economy [
24,
25]. Therefore, a prompt and efficient mode encourages foreign investors to make favorable decisions regarding their capital investment and technology transfer.
Our contribution, first, regarding the nexus between the FDI-led technological innovations, the existing literature posted that a growing number of studies have been executed in exploring the effects of FDI on technological innovation [
3,
8,
10,
26]. It is assumed that the host country’s capacity for technological innovation may benefit greatly from the technology spillover effect brought about by foreign direct investment [
27,
28]. Nonetheless, very few studies have been initiated in the literature exploring the nexus of technological innovation-led FDI inflows in the economy [
29]. The country’s capability to adopt the technology transfer through FDI critically depends on the economic environment in fostering technological innovation, and such conducive ambiance plays a beneficiary role in enticing the inflows of FDI. This argument supports the hypothesis that emerging nations would exhibit a leapfrogging pattern of technological development. To continue their march toward progress, emerging economies are conscious that they must bridge the technology divide and increase their capacity for innovation. Increasing resilience in the face of unique risks provided by the modern business environment is closely connected with the increased ability to innovate and exploit new technology [
30]. Second, referring to the existing literature focusing on the impact of financial innovation on the aggregated economy, a growing number of studies have documented a positive linkage with economic growth [
31,
32], financial development [
33], financial inclusion [
25], trade openness [
34,
35,
36]. Moreover, the selected macro fundamentals, such as financial development, trade openness, and financial inclusion, have significant effects on the behavior of FDI inflows in the economy [
37,
38,
39,
40]. The study by Qamruzzaman and Wei postulated that access to financial services from financial institutions acts as a catalyst in thriving the trend of the FDI inflows in the economy. Furthermore, the study suggested that financial innovation, adaptation, and diffusion in the financial system established a conducive ambiance in progressing the easy access to FIs to enjoy financial benefits. So it is implied that financial innovation indirectly affects FDI through the financial channel. However, as far as the present literature is concerned, the direct nexus between financial innovation and FDI has yet to be highlighted, thus managing the existing literature gap with the fresh evidence, the study has investigated the effects of financial innovation on the FDI inflows.
The purpose of the study is to evaluate the effects of the innovations, which is categorized by the technological (TI), financial (FI) and environmental (EI) innovations, on the FDI inflows in BRIC nations for the period 1990–2019.
In documenting the association and the explanatory variable’s coefficients magnitudes on FDI, we implemented several econometrical techniques, including the Bayer–Hanck combined cointegration test, the augmented ARDL, the nonlinear ARDL and the Fourier TY casualty test. In terms of the stationary test, the test statistics have revealed that all of the variables are stationary after the first difference. Moreover, the structural break test divulged one break year in the data set, and the study incorporated the structural break effects in line with the explained variable. The long run association between the explanatory explained and control variables has been unveiled with the test statistics of the combined cointegration. Furthermore, the long run cointegration in the empirical equation has been found in the linear and nonlinear assessments. In terms of the symmetric investigation, the coefficient of innovation, that is, TI, FI, and EI on FDI, were revealed to be positive and statistically significant at a 1% level, suggesting that the innovation culture in the economic boost of the inflows of FDI, both in the long run and short run. Furthermore, the asymmetric association was confirmed by implementing the standard Wald test with the null symmetry hypothesis in the long and short runs. Referring to the asymmetric coefficients, it is apparent that the positive and negative shocks of TI, FI, and EI positively tie to FDI, which is significant at a 1% level. According to the elasticities of the asymmetric shocks, the positive innovation disclosed a more prominent impact than the negative innovation. Thus it is advocated to ensure a conducive innovation environment by mobilizing economic resources.
The rest of the section is as follows. The related literature survey and hypothesis construction are based on the literature reported in
Section 2. Variable proxies, theoretical development and estimation strategies are exhibited in
Section 3. The empirical model estimation by employing econometrical techniques and their interpretation available in
Section 4. Discussion of the study findings reported in
Section 6. Conclusions and policy suggestions in
Section 7.
4. Estimation and Interpretation
Stationary properties of the research units have a critical impact on the robust econometrical tool selection. We thus have implemented several unit root tests in assessing the variables’ order of integration, by following the unit root framework familiarized by [
90], Phillips and Perron [
91,
92,
93], and the study performed by the unit root test and the unknown structural break unit root test [
94] (
Table 2).
In the following, the present study has extended the stationary test with the implementation of Ng and Perron’s [
102] unit root test, and their results are displayed in
Table 3. Inferring the test statistics, i.e., MZa, MZt, MSB, and MPT, the study institutes that all of the test statistics are higher than the critical values at a 1% level, indicating the cancellation of the null hypothesis. Instead, it confirms the order of integration after the first difference I (1).
Following the unit root test introduced by Zivot, we assess the variables’ order of integration with the possible break year; the results of the unit root with a structural break are displayed in
Table 4. In terms of the test statistics, all of the variables have exposed stationary after the first difference with one break year. Especially, the break year for FDI in Brazil is 5.6051(2007), in Russia is 5.1569(2012), in India is 8.4561(2003), and in China 4.8959(2005), respectively.
The novel combined cointegration test [
95] assessed the long run association between FDI, TI, FI, EI, FD and IQ in the BRIC nations.
Table 5 exhibited the results of the cointegration test. In terms of the test statistics derived from the cointegration test, i.e.,
EG-JOH & EG-JOH-BO-BDM, they were revealed to be statistically significant at a 5% level, suggesting the long run cointegration in the empirical model.
Next, the study implemented the augmented ARDL framework in depicting the long run linkage between the explanatory and explained variables by executing the Equation (19).
Table 6 reported the results of the test statistics derived for cointegration assessment. Referring to the test statistics, i.e., F
overall, t
DV, and F
IDV, it is apparent that all of the test statistics are statistically significant at a 1% significance, suggesting the long run cointegration between the research units in all four sample countries.
4.1. Long Run and Short Run Coefficients: AARDL Estimation
Table 7 displayed the long run and short run coefficients and the test statistics from the residual diagnostic tests in the panel A, B, and C, respectively.
The BRIC thesis has established a positive and statistically significant linkage to the coefficient of the technological innovation on FDI inflows. Specifically, a 1% increase of TI in the economy will result in an acceleration of the FDI inflows in Brazil by 0.1574% (0.0748), Russia by 0.0542% (0.0902%), India by 0.0515% (0.0714%), and China by 0.1157% (0.1093%), respectively. Taking into account the magnitudes of technological innovation on FDI, the study depicts that in the long run, the inflows of FDI will be more responsive due to TI in Brazil and China, whereas the inflows of FDI in Russia and India have been significantly responsive in the short run due to TI. Even though a positive tie was found between TI and FDI, the response to the FDI inflows varies due to the economic structure and other macro agents’ presence in the economy.
The coefficient of financial innovation displayed positive inflows of FDI in the BRIC nations in the long and short runs, and all of the coefficients are statistically significant at 1%. In the long run, a 1% improvement in FI will intensify the appearance of foreign contribution in the form of FDI in Brazil by 0.1461%, Russia by 0.1551%, India by 0.1704%, and China by 0.0814%, respectively. In terms of the short run investigation, the contributory effects from FI to FDI are detected, in particular, a 10% progress can accelerate the inflow of FDI in Brazil by 0.329%, Russia by 0.132%, India by 0.318%, and China by 0.237%. In terms of the elasticities intensity, even though the favorable impact is documented in the long run and short run, the inflows of FDI are more responsive in the long run.
The study found that the contributory effects of environmental innovation (EI) on the FDI accumulation in the long run and short run, suggesting environmental sustainability through efficient technology inclusion, especially for carbon emissions. In particular, a 10% increase in investment for R&D targeting green innovation which results in a positive momentum in receiving FDI in the host economy in the long run (short run), particularly in Brazil by 0.1134% (0.0565%), Russia by 0.0417% (0.0338%), India by 0.0842% (0.0413%), and China by 0.1277% (0.0112%), respectively. The study findings have established encouraging effects on FDI that environmental innovation has duel effects on the economy; that is, the increases of the FDI inflows, side by side, prompt environmental sustainability. Usman, et al. [
105] advocated that environmental efficiency and ecological balance can be obtained through cultivating innovation focusing on environmental protection, meaning that investment in environmental protection improves energy efficiency, leading to environmental sustainability.
The empirical model estimation passes several diagnostic tests to ensure conceptual model conformity and estimation consistency. Referring to the test statistics derived from a residual diagnostic test, the study confirmed that the estimation models are free from serial correlation and residuals are normally distributed in all four target models. Moreover, the efficient estimation has been established through the Ramsey test.
4.2. Asymmetric Investigation: TI, FI, and EI on FDI
Next, the possible long run association between the asymmetric decomposition of explanatory variables and the explained variables has been exposed with the cointegration assessment procedure in AARDL.
Table 8 displays the test statistics dealing with the long run associations, and it is apparent that all of the test statistics are revealed to be statistically significant at a 1% level. This confirms the empirical model’s asymmetric linkage between the explained and explanatory variables.
Panel–C in
Table 9 displays the standard Wald test statistic results with the null hypothesis of symmetry in the long and short runs. Referring to the Wald test results, it is obvious that all of the test statistics are statistically significant at a 1% level, implying the rejection of the tested null hypothesis. Alternatively, it establishes the asymmetric linkage between the explained variables, i.e., FDI and explanatory variables. Thus, we conclude that there is an asymmetric association in the empirical equation, both in the long and short runs.
In Panel-A, the long run asymmetric coefficient is displayed. Referring to the asymmetric coefficients of technological innovation, that is on the FDI inflows in the BRIC nations, a study publicized a positive and statistically significant linkage between them, in the long run (short run). More precisely, a 10% positive variation in TI, according to elasticity, will result in the improvisation of receiving FDI in Brazil by 0.719% (0.287%), Russia by 0.0986% (0.0369%), India by 0.1758% (0.0326%) and China by 0.0949% (0.0701), respectively. Additionally, a 1% contraction in promoting TI in the economy can shrinkage the present trend in the FDI inflows in Brazil by 0.0928% (0.0095%), Russia by 0.0296% (0.0175%), India by 0.1127% (0.0401%), and China by 0.0361% (0.0401%), respectively. Following the asymmetric elasticity, it is revealed that, especially in the long run, it is imperative to induce technological innovation by offering incentives and other privileges to attract foreign investment for economic progress. Nevertheless, the shrink in technological innovation has adversely hurt the FDI inflows in the BRIC nations, especially in India and Brazil, compared to Russia and China.
A positive connection between the asymmetric variables of financial innovation, i.e., Moreover, FDI has been disclosed in the long run and short run in the BRIC nations, suggesting that innovation in the financial system encourages foreign investors to mobilize their economic resources in the economy, exhibiting financial efficiency and efficient intermediation. In particular, with a 10% progress in innovation, the concentrating financial system expedites the foreign capital contribution in the form of FDI in Brazil by 1.398% (0091%), Russia by 1.123% (0.705%), India by 1.273% (0.317%), and China by 1.262% (0.481%). Moreover, the adverse shocks in financial innovation degraded the persistence inflows of FDI in Brazil by 0.334% (0.595%), Russia by 0.546% (0.451%), India by 0.412% (0.085%), and China by 0.592% (0.651%). In terms of the elasticities of the asymmetric variables, the positive innovation establishes a significant impact on the FDI inflows, in comparison to the negative shocks, implying that progressive changes in the financial system with the inclusion and diffusion of innovative financial products and services, portray the financial development with efficiency which entice foreign investors to transfer their capital and technological support to that economy.
The coefficients of positive (negative) shock in environmental innovation revealed a positive and statistically significant linkage with the BRIC nations FDI inflows in the long and short runs. More precisely, the inflows of FDI will accelerate (reduce) in Brazil by 1.191% (1.089%), Russia by 1.375% (0.355%), India by 0.832% (0.266%), and China by 0.751% (0.154%), due to a 10% improvement (degradation) in innovation focusing on environmental protection. Additionally, the positive connectivity in the short run asymmetric investigation has unleashed, precisely, a 10% variation with the positive (negative) trend in FI will result in the acceleration (shrink) of FDI inflows in Brazil by 0.221% (0.168%), and Russia by 0.445% (0.595%), 0.335% (0.421%), 0.615% (0.482%). In terms of the magnitudes of the asymmetric coefficients, it is apparent that positive increments in EI have significant effects on FDI, both in the long and short runs, compared to the negative trends in EI. Therefore, it is suggested that to attract foreign investors to mobilize their technology and capital in the host economy, it is imperative to ensure the continual inflows of investment in innovation, concentrating on environmental protection through green technology.
Next, the directional association in the empirical equation has been derived by implementing the novel Toda–Yamamoto causality test with the Fourier function, familiarized by Enders and Jones [
106]. According to the directional association, the feedback hypothesis holds between technological innovation and FDI in Russia, India, and China, financial innovation and FDI in Brazil and India, environmental innovation and FDI in Brazil and China, and institutional quality and FDI in India, respectively. Moreover, the unidirectional causality revealed that FDI led technological innovation in Brazil, FDI led financial innovation in Russia and China, environmental innovation led FDI in Russia, and FDI led environmental innovation in India, financial development prompted by FDI in Brazil and China, and FDI improved governmental effectiveness in Brazil and Russia (
Table 10).
6. Discussion
The study revealed a positive statistically significant linkage between technological innovation and FDI in the BRIC nations in the long and short runs. Referring to the symmetric estimation, a 1% increase of TI in the economy will result in the acceleration of the FDI inflows in Brazil by [
, Russia by [
, India by [
and China by
, respectively. The existing literature supports our study findings [
29,
109]. Taking into account the magnitudes of technological innovation on FDI, the study depicts that, in the long run, the inflows of FDI are more responsive, due to TI in Brazil and China, whereas the inflows of FDI in Russia and India are significantly responsive in the short run, due to TI. Even though a positive tie was found between TI and FDI, the response to the FDI inflows varies due to economic structure and other macro agents’ presence in the economy. Regarding the asymmetric nexus between TI and FDI, we found that the asymmetric coefficients of TI [] create a positive connection with FDI, which is statistically significant at a 1% level. In particular, a 1% positive (negative) shock in TI will generate catalyst (diminishing) effects on the inflows of FDI in the BRIC nations. Following the asymmetric elasticity, it is revealed that it is imperative to induce technological innovation by offering incentives and other privileges, especially in the long run, to attract foreign investment for economic progress. Nevertheless, the shrink of technological innovation has adversely hurt the FDI inflows in the BRIC nations, especially in India and Brazil, compared to Russia and China. The ability to easily maintain the advantages of FDI is becoming easier to achieve as a result of improvements in technology. According to Borensztein, et al. [
110], rising nations gain from technology transfers brought about by foreign direct investment (FDI) inflows.
Consequently, technology may be the most significant factor driving inward FDI in these economies. According to Hsu and Tiao [
111], a favorable investment climate that facilitates technology transfers benefits FDI. Moreover, the study of Cumming and Zhang [
112] postulated that the economic capacity to adopt technological change is significantly influenced by technological innovation and the attractive ambiance in transferring technological know-how through FDI, alluring foreign investors.
Referring to symmetric and asymmetric empirical estimations, the study exposed a positive and statistically significant linkage between financial innovation and the inflows of FDI in the BRIC nations. These findings advocate the beneficiary role of FI in accelerating FDI in the economy by offering efficient financial intermediation and financial efficiency; particularly, the efficiency in the financial institutions has enticed foreign investors to channel economic resources into the host economy with an efficient financial system. In particular, according to the symmetric coefficients with a 10% positive change in FI, they can entice foreign investors and encourage them to mobilize economic resources in the form of FDI in Brazil by 0.1461% (0.329%), Russia by 0.1551% (0.132%), India by 0.1704% (0.318%), and China by 0.0814%, respectively. In terms of the elasticities intensity, even though the favorable impact is documented in the long run and short run, the inflows of FDI are more responsive in the long run. Moreover, the asymmetric assessment exposed the positive (negative) shocks in FI that are positively connected in the long and short runs. Precisely, a 10% positive (negative) change in FI, according to the magnitudes, exhibits that the FDI inflows will be augmented (degraded) in Brazil by 1.398% (0.334%), Russia by 1.123% (0.546%), India by 1.273% (0.412%), and China by 1.262% (0. 592%). In terms of the elasticities of asymmetric variables, the positive innovation establishes a significant impact on the FDI inflows in comparison to the negative shocks, implying that progressive changes in the financial system with the inclusion and diffusion of innovative financial products and services portray the financial development with efficiency, which entice foreign investors to transfer their capital and technological support to that economy. The literature advocated that the investment in research and development expand skills and human capital development and more innovative infrastructure, characterized by the protection of property rights, trade openness and national innovation [
113,
114,
115]
The association between environmental innovation and FDI in the BRIC nations has explored positively the connections in a symmetric and asymmetric framework, signifying the beneficiary effects of innovation in managing the environment on the FDI inflows by enticing foreign investors to transfer technology and mobilizing capital. Our study findings are supported by [
87]. In terms of the symmetric assessment, in the long run (short run), a 1% increase in investment for R&D targeting the green innovation which results in a positive momentum in receiving FDI in the host economy, in the long run (short run), particularly in Brazil by 0.1134% (0.0565%), Russia by 0.0417% (0.0338%), India by 0.0842% (0.0413%), and China by 0.1277% (0.0112%), respectively. Study findings established an encouraging effect on FDI. Environmental innovation has dual effects on the economy, increasing the FDI inflows and promoting environmental sustainability. Usman, Radulescu, Balsalobre-Lorente and Rehman [
105] advocated that environmental efficiency and ecological balance can be obtained through cultivating innovation focusing on environmental protection, meaning that investment in environmental protection improves energy efficiency, leading to environmental sustainability. In terms of the magnitudes of the asymmetric coefficients, it is apparent that positive increments in EI have significant effects on FDI both in the long and short runs, compared to the negative trends in EI. Therefore, it is suggested that, for attracting the foreign investors in mobilizing their technology and capital in the host economy, it is imperative to ensure the continual inflow of investment in innovation concentrating on environmental protection through green technology. Precisely, the inflows of FDI will be accelerated (reduced) in Brazil by 1.191% (1.089%), Russia by 1.375% (0.355%), India by 0.832% (0.266%), and China by 0.751% (0.154%) due to a 10% improvement (dilapidation) in innovation focusing on environmental protection.
7. Conclusions
The purpose of the study is to evaluate the effects of innovation, which is categorized by the technological (TI), financial (FI), and environmental (EI), groups, on the FDI inflows in the BRIC nations for the period 1990–2019. In documenting the association and the explanatory variables’ magnitudes on FDI, we implemented several econometrical techniques, including the Bayer-Hanck combined cointegration test, the augmented ARDL, the nonlinear ARDL, and the Fourier TY casualty test. The key findings from the study are as follows.
First, in terms of the stationary test, the test statistics have revealed that all the variables are stationary after the first difference. Moreover, the structural break test divulged one break year in the data set, and the study incorporated the structural break effects in line with the explained variable.
Second, the long run association between the explanatory explained and control variables has been unveiled with the test statistics of the combined cointegration. Furthermore, the long run cointegration in the empirical equation has been found in the linear and nonlinear assessments.
Third, In terms of the symmetric investigation, the coefficients of innovation, that is, TI, FI, and EI on FDI, were revealed to be positive and statistically significant at a 1% level, suggesting that the innovation culture in the economic boost of the inflows of FDI, both in the long run and the short run.
Fourth, the asymmetric association was confirmed by implementing the standard Wald test with the null symmetry hypothesis in the long and short runs. Referring to the asymmetric coefficients, it is apparent that the positive and negative shocks of TI, FI, and EI, positively tie to FDI; according to the elasticities of the asymmetric shocks, the positive innovation disclosed a more prominent impact than the negative innovation. Thus it is advocated to ensure a conducive innovation environment through mobilizing the economic resources.
The following suggestions have been proposed from the study findings.
The innovation-led FDI advocated the beneficial role in attracting foreign investors and mobilized their resources in the BRIC nations. Thus, taking note of the study findings, it is suggested that the innovation policies in the BRIC nations have to be aligned with the industrial, economic, and financial policies. That is, the industrial absorption capacity in accepting innovative technology in their process requires substantial capital investments, and in some instances, industries have exhibited a disinclination for technological improvement. Thus, the BRIC nations have to devise incentives for industrial development through technological advancement. This economic ambiance eventually entices the investors to make favorable investment decisions and transfer capital and technology, in the form of FDI.
Governmental effectiveness was revealed to be positively connected with FDI. On the ground of further improvement in the inflows of FDI, the study advocated that the BRIC nations have to ensure the investors’ protection, good governance, and political stability in inducing foreign investors to mobilize the economic resources in the host economy from the home economy.
Economic stability has been considered the key deterministic factor in encouraging the FDI inflows, suggesting that instability and uncertainty adversely impact foreign investor decisions, especially in the long run. The protection of investors’ rights and economic accountability was found to be a catalyst in the equation of FDI and was confirmed by the existing literature [
15,
16,
116,
117]. For instance, Chen, et al. [
118] advocated for the favorable effects of good governance on FDI by highlighting the beneficiary role of good governance in mitigating economic risks, such as environmental and political risks and offering a conducive ambiance for progress. Therefore, we suggested that the BRIC nations ensure and depict an investment-oriented economy with an efficient institution that confirms a governmental effectiveness and the protection of investor rights.