NONLINEAR EFFECTS OF PORTFOLIO INVESTMENT ON GREEN GROWTH IN PAKISTAN: A THRESHOLD REGRESSION ANALYSIS

Abstract

Green growth has become a central objective of sustainable development, requiring efficient financial mechanisms to support environmentally responsible economic transformation. Although foreign portfolio investment (FPI) represents an increasingly important source of external finance for developing economies, its contribution to green growth remains inconclusive due to its volatile nature and the potential for nonlinear effects. This study investigates whether the impact of portfolio investment on green growth in Pakistan varies across investment regimes by identifying a critical threshold level.  The analysis employs annual time-series data for Pakistan covering the period 1995–2021 and applies Hansen's (1999) Threshold Regression Model (TRM) to examine the nonlinear relationship between portfolio investment and green growth. Renewable energy consumption, real GDP per capita, trade openness, and inflation are included as control variables. The findings identify an estimated portfolio investment threshold of −0.103% of GDP; however, the bootstrap threshold test indicates that the estimated threshold is statistically insignificant, suggesting no robust evidence of a nonlinear regime shift. Both the baseline and threshold models reveal that portfolio investment exerts a positive but statistically insignificant effect on green growth. The findings suggest that increasing portfolio investment alone is insufficient to promote green growth unless capital inflows are effectively channeled towards environmentally sustainable and productive sectors. Strengthening sustainable finance frameworks, capital market governance, and green investment policies is therefore essential for enhancing the environmental contribution of foreign capital. The study contributes to the sustainable finance literature by providing one of the first threshold-based empirical assessments of the portfolio investment–green growth nexus in Pakistan and offers valuable policy insights for advancing sustainable economic development.