Foreign Direct Investment and Environmental Sustainability Impacts
Summary
Foreign direct investment (FDI) plays a dual role in global environmental sustainability. On one hand, FDI can promote the transfer of cleaner technologies and management practices, thereby enhancing green innovation, resource efficiency and the development of sustainable industrial processes. On the other hand, investment inflows into jurisdictions with lax environmental oversight may exacerbate pollution and carbon emissions, a phenomenon often described as the pollution haven effect. The balance of these outcomes depends on host-country regulatory stringency, institutional quality and the strategic motivations of investors—whether they seek market access, resources or technology. Empirical evidence highlights strong regional heterogeneity: in emerging economies, FDI linked to technology-seeking activities tends to yield positive spillovers in energy efficiency and green total factor productivity, whereas investment driven purely by low environmental costs can undermine local sustainability goals. Policies that combine clear environmental standards with incentives for green investment have been shown to shift the impact of FDI towards sustainable pathways, reinforcing the importance of governance, transparency and cross-border cooperation in shaping long-term environmental outcomes.
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Foreign Direct Investment and Environmental Sustainability Impacts publication trend
The graph below shows the total number of articles in foreign direct investment and environmental sustainability impacts across all publications each year (not limited to Nature Index journals).
Technical terms
Foreign Direct Investment (FDI): Cross-border capital flows where an investor acquires a lasting interest and significant influence in the management of an enterprise in another economy.
Pollution Haven Hypothesis: The proposition that firms relocate pollution-intensive production to jurisdictions with weaker environmental regulations, thereby increasing host-country emissions.
Pollution Halo Hypothesis: The assertion that FDI can bring cleaner production techniques and managerial expertise that improve environmental performance in host economies.
Green Total Factor Productivity (GTFP): A measure of output growth accounting for inputs and environmental factors, reflecting the efficiency gains from technological and organisational improvements.
References
- The influence of democracy, corruption, economic growth and ICT on carbon emissions in Sub-Saharan African countries: Does FDI matter?. Journal of Open Innovation: Technology, Market, and Complexity (2024).
- Economic Policy Uncertainty, Outward Foreign Direct Investments, and Green Total Factor Productivity: Evidence from Firm-Level Data in China. Sustainability (2021).
- Environmental Regulation, Foreign Direct Investment and Green Technological Progress—Evidence from Chinese Manufacturing Industries. International Journal of Environmental Research and Public Health (2018).
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