Green Waves and Investment Currents: Unraveling the Dynamic Linkage between Environmental Regulations and FDI Inflows
Abstract
Incoming foreign direct investments (FDI) are considered as a crucial driver of economic development, innovation, and infrastructure improvement. Creating favorable conditions and eliminating obstacles to FDI remain top priorities for governments worldwide. Critical FDI determinants incorporate cost competitiveness, market size, institutional quality, and proximity metrics – alongside emerging environmental considerations. In today’s context, climate change and states’ intentions to mitigate its adverse effects have the potential to shape the dynamics and composition of FDI streams. The research investigates the impact of environmental regulations on FDI inflow on a global scale. This study constructs databases with a panel structure containing statistics on developed and developing nations during the period of 2000–2020. The empirical investigation employs the dynamic common correlated effects (DCCE) and Driscoll – Kraay fixed effects standard error (D-K FE) approaches, enabling to control for cross-sectional dependency, heteroscedasticity, autocorrelation, and endogeneity problems. The empirical findings indicate that environmental regulation, when considered in isolation, may constrain FDI inflow. On the other hand, in economically advanced settings, regulation can signal institutional quality and market maturity, thereby enhancing investment appeal despite higher compliance costs. This evidence suggests that emerging countries trying to align foreign investment flows with environmental conservation efforts are at heightened risk. These nations must direct their efforts toward enhancing economic capacity and designing environmental regulations that can further boost it.
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