Filter-out hypothesis: Can outward flows of foreign direct investment contribute to a cleaner productive system in the European Union?

In this paper, we examine the relationships among outward foreign direct investment (OFDI), the adoption of green technologies, and the generation of municipal waste among European Union countries from 2000 to 2022. This relationship is situated within the context of transitioning to green economies and theoretically aligns with the pollution haven and halo hypotheses, which suggest that engaging in FDI has environmental impacts. By employing FGLS (Feasible Generalized Least Squares) and PCSE (Panel Corrected Standard Errors) estimation techniques to ensure robust estimators, our findings indicate that OFDI contributes to a reduced generation of municipal waste, thereby filtering out companies that generate externalities and facilitating the transition to cleaner economies within the framework of green economies. This process can be further facilitated by the adoption of green technologies; however, the operationalization of the variable used in our estimation may not accurately reflect this relationship. To strengthen the progress made during this transition process, governments should promote policies that encourage the adoption of more sustainable processes and technologies, thereby reducing waste generation. This entails supporting the most efficient companies and encouraging the transformation of firms that still rely on polluting production processes.