Thesis Model Draft

Financial Inclusion, Technological Innovation, and Environmental Pollution

in Bangladesh

Research Objective:
To explore the impact of financial inclusion and technological innovation on environmental pollution in Bangladesh,
accounting for the role of economic development, foreign direct investment (FDI), and renewable energy use. The study
further investigates the moderating effect of technological innovation on the relationship between financial inclusion
and environmental pollution.

Model Specification:
Environmental Pollution = β0 + β1(Financial Inclusion) + β2(Technological Innovation) + β3(Financial Inclusion ×
Technological Innovation) + β4(GDP) + β5(GDP^2) + β6(FDI) + β7(Renewable Energy Use) + β8(Green Trade
Openness Index) + β9(Total Energy Consumption) + ε

Variable Description and Measurement:

1. Environmental Pollution (Dependent Variable):

- Measurement: Carbon emissions (metric tons per capita) or Ecological footprint (global hectares per capita).
- Justification: Reflects the environmental impact of economic activities, providing a direct measure of air pollution
(carbon emissions) or a broader perspective on environmental degradation (ecological footprint).

2. Financial Inclusion (Independent Variable):

- Measurement: Index composed of Automated Teller Machines (ATMs) per 100,000 adults, branches of commercial
banks per 100,000 adults, number of institutions of commercial banks in Bangladesh, outstanding deposits with
commercial banks (% of GDP), and outstanding loans with commercial banks (% of GDP).
- Justification: Captures the extent of access to and usage of financial services, indicating the role of financial systems
in economic activities that may affect environmental pollution.

3. Technological Innovation (Independent Variable):

- Measurement: Index composed of technology exports (% of manufacturing exports), internet users (% of
population), mobile subscriptions per 100 people, and total number of patents by residents.
- Justification: Reflects the country's technological advancements, which can enhance production efficiency and
reduce environmental impact through cleaner and more efficient processes.

4. Interaction Term (Financial Inclusion × Technological Innovation):

- Justification: Examines how technological innovation influences the relationship between financial inclusion and
environmental pollution, indicating whether technological progress can mitigate or exacerbate the environmental effects
of increased financial access.
5. Economic Development (Control Variable):
- Measurement: GDP per capita and its square (GDP^2) to capture the Environmental Kuznets Curve (EKC)
hypothesis.
- Justification: Allows for the examination of the non-linear relationship between economic growth and environmental
pollution, exploring whether increased wealth leads to better environmental outcomes at higher levels of income.

6. Foreign Direct Investment (FDI) (Control Variable):

- Measurement: Net inflows of FDI as a percentage of GDP.
- Justification: Assesses the impact of foreign investment on environmental quality, considering both the potential
transfer of cleaner technologies and the "pollution haven" hypothesis.

7. Renewable Energy Use (Control Variable):

- Measurement: Share of renewable energy in total energy consumption.
- Justification: Evaluates the role of clean energy sources in reducing environmental pollution, highlighting the
importance of transitioning towards sustainable energy solutions.

8. Green Trade Openness Index (Additional Variable):

- Measurement: Ratio of environmentally friendly goods traded to total goods traded.
- Justification: Investigates the impact of trading green goods on environmental quality, assessing whether
international trade in eco-friendly products contributes to environmental sustainability.

9. Total Energy Consumption (Additional Variable):

- Measurement: Total primary energy consumption (in terajoules or equivalent).
- Justification: Provides a comprehensive view of the country's energy demand and its implications for environmental
pollution, differentiating between renewable and non-renewable energy sources.

Financial Inclusion Index

1. Data Collection: Gather data on the indicators comprising the Financial Inclusion Index for Bangladesh:
- Automated Teller Machines (ATMs) per 100,000 adults
- Branches of commercial banks per 100,000 adults
- Number of commercial banks (institutions)
- Outstanding deposits with commercial banks (% of GDP)
- Outstanding loans with commercial banks (% of GDP)

2. Index Construction: We can use Principal Component Analysis (PCA) or a similar method to aggregate these
indicators into a single Financial Inclusion Index. This involves standardizing the data and calculating the principal
components, with the first principal component often used as the composite index.
Technological Innovation Index
1. Data Collection: Obtain data on the technological innovation indicators for Bangladesh:
- Technology exports (% of manufacturing exports)
- Internet users (% of population)
- Mobile subscriptions per 100 people
- Total number of patents by residents

2. Index Construction: Similar to the Financial Inclusion Index, We can use PCA or another method to combine these
indicators into a single Technological Innovation Index. Standardize the data before aggregation to ensure that each
indicator contributes proportionately to the index.

Green Trade Openness Index

1. Data Collection: This requires data on the import and export of environmentally friendly goods as a proportion of
total trade. This can be challenging as it involves classifying goods based on their environmental impact, which may
require accessing detailed trade databases and potentially environmental impact assessments.

2. Index Construction: Calculate the ratio of the trade value of green goods to the total trade value (sum of imports and
exports). Green goods can include renewable energy technology, organic agricultural products, and other
environmentally friendly goods. The higher the ratio, the greater the country's green trade openness.

𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 =
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉
Where:

• Value of Green Goods Traded is the sum of the export and import values of environmentally friendly goods.
• Total Trade Value is the sum of the total export and import values of all goods.

Total Energy Consumption

1. Data Collection: Total energy consumption data can usually be obtained from national energy statistics, international
energy agencies (e.g., International Energy Agency or the World Bank), or relevant government departments. This data
is typically reported in terajoules (TJ) or equivalent units.

2. Normalization: Depending on the model's specification, you might need to normalize this data per capita or as a
percentage of GDP to facilitate comparison over time or with other variables in the model.

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝 𝐺𝐺𝐺𝐺𝐺𝐺 =
𝐺𝐺𝐺𝐺𝐺𝐺

Methodological Approach:
The study employs the Method of Moments Quantile Regression to capture the differential effects of financial inclusion
and technological innovation across the distribution of environmental pollution. This approach allows for a nuanced
understanding of how these relationships may vary at different levels of environmental impact, addressing potential
endogeneity concerns and providing robust estimates of the model parameters.