IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v86y2025ipes1544612325019786.html

The effect of foreign direct investment flows on mitigating climate change vulnerability in developing countries

Author

Listed:
  • Jia, Jinan
  • Zhang, Renhua
  • Zhao, Guangpu
  • Zhao, Zihao
  • Chen, Feiya

Abstract

Foreign aid plays a crucial role in helping developing countries address climate change. This paper employs data from 100 developing countries over 2016-2022, integrating a two-way fixed effects model with mediation analysis to methodically ascertain the mechanisms through which foreign direct investment (FDI) affects climate change vulnerability (CV). The findings suggest that FDI inflows significantly reduce CV, with a 1% rise in FDI resulting in 0.9% decline in CV. A thorough mechanism analysis reveals that FDI indirectly mitigates vulnerability through two key pathways: increasing domestic credit (DC) and promoting renewable energy (RE). It has been demonstrated that each incremental unit of DC and RE results in a reduction of CV by 0.9% and 0.6% respectively. These findings indicate that developing countries can enhance their climate resilience by directing foreign investment into the credit and energy sectors simultaneously.

Suggested Citation

  • Jia, Jinan & Zhang, Renhua & Zhao, Guangpu & Zhao, Zihao & Chen, Feiya, 2025. "The effect of foreign direct investment flows on mitigating climate change vulnerability in developing countries," Finance Research Letters, Elsevier, vol. 86(PE).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pe:s1544612325019786
    DOI: 10.1016/j.frl.2025.108724
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612325019786
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2025.108724?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Sun, Mingxing & Xu, Xiangbo & Wang, Le & Li, Chang & Zhang, Linxiu, 2021. "Stable energy, energy inequality, and climate change vulnerability in Pan-Third Pole regions: Empirical analysis in cross-national rural areas," Renewable and Sustainable Energy Reviews, Elsevier, vol. 147(C).
    2. Ronald Wall & Stelios Grafakos & Alberto Gianoli & Spyridon Stavropoulos, 2019. "Which policy instruments attract foreign direct investments in renewable energy?," Climate Policy, Taylor & Francis Journals, vol. 19(1), pages 59-72, January.
    3. Ma, Tiancheng & Li, Xindi & Xing, Jiayi & Yang, Miao, 2025. "Foreign direct investment, R&D investment and corporate green technological innovation," Finance Research Letters, Elsevier, vol. 85(PD).
    4. Sun, Haibo & Han, Fangyuan & Liu, Zhonglu, 2024. "Does executive environmental protection experience reduce enterprise energy consumption intensity?," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 652-666.
    5. Pickering, Jonathan & Skovgaard, Jakob & Kim, Soyeun & Roberts, J. Timmons & Rossati, David & Stadelmann, Martin & Reich, Hendrikje, 2015. "Acting on Climate Finance Pledges: Inter-Agency Dynamics and Relationships with Aid in Contributor States," World Development, Elsevier, vol. 68(C), pages 149-162.
    6. Xu, Haoran & Miao, Wenlong & Zhang, Siyu, 2025. "Cross-border capital inflows and systemic financial risks," International Review of Economics & Finance, Elsevier, vol. 99(C).
    7. Kumar, Rajesh & Agarwala, Arun, 2016. "Renewable energy technology diffusion model for techno-economics feasibility," Renewable and Sustainable Energy Reviews, Elsevier, vol. 54(C), pages 1515-1524.
    8. Shahzad, Adnan Ali & Anwar, Muhammad Awais & Arshed, Noman & Bilan, Yuriy, 2024. "Nexus between economic growth, renewable energy and climate vulnerability: A global perspective using the EKC framework," Renewable Energy, Elsevier, vol. 237(PC).
    9. Ann E. Harrison & Margaret S. McMillan, 2022. "Does direct foreign investment affect domestic credit constraints?," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 7, pages 153-180, World Scientific Publishing Co. Pte. Ltd..
    10. Guilherme N. Fasolin & Matias Spektor & Renan Marques & Juliana Camargo, 2025. "Determinants of climate change risk perception in Latin America," Nature Communications, Nature, vol. 16(1), pages 1-11, December.
    11. N. W. Feinstein & K. J. Mach, 2020. "Three roles for education in climate change adaptation," Climate Policy, Taylor & Francis Journals, vol. 20(3), pages 317-322, March.
    12. Rafael Alvarado & Elisa Toledo, 2017. "Environmental degradation and economic growth: evidence for a developing country," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 19(4), pages 1205-1218, August.
    13. Noreen Beg & Jan Corfee Morlot & Ogunlade Davidson & Yaw Afrane-Okesse & Lwazikazi Tyani & Fatma Denton & Youba Sokona & Jean Philippe Thomas & Emilio L�bre La Rovere & Jyoti K. Parikh & Kirit Parikh , 2002. "Linkages between climate change and sustainable development," Climate Policy, Taylor & Francis Journals, vol. 2(2-3), pages 129-144, September.
    14. Nadia Ameli & Olivier Dessens & Matthew Winning & Jennifer Cronin & Hugues Chenet & Paul Drummond & Alvaro Calzadilla & Gabrial Anandarajah & Michael Grubb, 2021. "Higher cost of finance exacerbates a climate investment trap in developing economies," Nature Communications, Nature, vol. 12(1), pages 1-12, December.
    15. Bukari, Chei & Acheampong, Alex O., 2025. "Mitigating the impact of climate change on poverty in Africa: the moderating role of financial inclusion," Finance Research Letters, Elsevier, vol. 84(C).
    16. Dunbar, Kwamie & Treku, Daniel N., 2025. "Do energy transition investment flows aid climate commitments?," Energy Economics, Elsevier, vol. 142(C).
    17. Liu, Xiaoxi & Yuan, Xiaoling & Ge, Xing & Jin, Zhongguo, 2024. "Adaptation and innovation: How does climate vulnerability shapes corporate green innovation in BRICS," International Review of Financial Analysis, Elsevier, vol. 94(C).
    18. Alam, Ashraful & Du, Anna Min & Rahman, Mahfuzur & Yazdifar, Hassan & Abbasi, Kaleemullah, 2022. "SMEs respond to climate change: Evidence from developing countries," Technological Forecasting and Social Change, Elsevier, vol. 185(C).
    19. Shao, Yanmin & Li, Junlong & Zhang, Xueli, 2024. "Outward foreign direct investment and green technology innovation: A company and host country perspective," Technological Forecasting and Social Change, Elsevier, vol. 203(C).
    20. Anthony Patt & Stefan Pfenninger & Johan Lilliestam, 2013. "Vulnerability of solar energy infrastructure and output to climate change," Climatic Change, Springer, vol. 121(1), pages 93-102, November.
    21. Kushawaha, Deepak, 2025. "Understanding the role of greenfield and mergers & acquisitions foreign direct investments in renewable energy expansion in developing countries," Energy Economics, Elsevier, vol. 145(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dunbar, Kwamie & Gao, Xin, 2025. "Advancing climate technology in developing nations through energy transition investments," Energy Economics, Elsevier, vol. 152(C).
    2. Feng, Lingbing & Huang, Dasen & Chen, Fengwen & Liao, Fangnan, 2024. "Leveraging climate risk disclosure for enhanced corporate innovation: Pathways to sustainable and resilient business practices," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    3. Caixia Wang & Huijie Li, 2025. "What influences the capacity of donor agency for sustainable development: a study of climate aid projects," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 27(7), pages 16941-16961, July.
    4. Adithya Thaduri & Diego Galar & Uday Kumar, 0. "Space weather climate impacts on railway infrastructure," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 0, pages 1-15.
    5. Sourafel Girma & Yundan Gong & Holger Görg, 2016. "Foreign Direct Investment, Access to Finance, and Innovation Activity in Chinese Enterprises," World Scientific Book Chapters, in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT Volume 53: World Scientific Studies in International Economics, chapter 5, pages 79-94, World Scientific Publishing Co. Pte. Ltd..
    6. Erik Lundsgaarde & Niels Keijzer, 2019. "Development Cooperation in a Multilevel and Multistakeholder Setting: From Planning towards Enabling Coordinated Action?," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 31(2), pages 215-234, April.
    7. Mubashir Ahmad Aukhoon & Junaid Iqbal & Zahoor Ahmad Parray, 2024. "Impact of corporate social responsibility on employee green behavior: Role of green human resource management practices and employee green culture," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 3768-3778, September.
    8. Skare, Marinko & Gavurova, Beata & Sinkovic, Dean, 2023. "Regional aspects of financial development and renewable energy: A cross-sectional study in 214 countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1142-1157.
    9. B. Venkatraja, 2021. "Does China exhibit any evidence of an Environmental Kuznets Curve? An ARDL bounds testing approach," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 88-110,111-.
    10. Girma, Sourafel & Görg, Holger & Strobl, Eric & Walsh, Frank, 2008. "Creating jobs through public subsidies: An empirical analysis," Labour Economics, Elsevier, vol. 15(6), pages 1179-1199, December.
    11. Han Xuemei & Sher Ali & Hazrat Bilal, 2025. "Carbon reduction initiatives impact on the employee relocation," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 12(1), pages 1-21, December.
    12. Bastian Gawellek & Jingjing Lyu & Bernd Süssmuth, 2016. "Did Chinese Outward Activity Attenuate or Aggravate the Great Recession in Developing Countries?," CESifo Working Paper Series 5735, CESifo.
    13. Sajal Lahiri & A. K. M. Mahbub Morshed, 2010. "Current Account Imbalances and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 369-381, May.
    14. Raissa Sorgho & Carlos A. Montenegro Quiñonez & Valérie R. Louis & Volker Winkler & Peter Dambach & Rainer Sauerborn & Olaf Horstick, 2020. "Climate Change Policies in 16 West African Countries: A Systematic Review of Adaptation with a Focus on Agriculture, Food Security, and Nutrition," IJERPH, MDPI, vol. 17(23), pages 1-21, November.
    15. Jorge M. Uribe, 2023. ""Fiscal crises and climate change"," IREA Working Papers 202303, University of Barcelona, Research Institute of Applied Economics, revised Feb 2023.
    16. Saidan, Motasem & Albaali, Abdul Ghani & Alasis, Emil & Kaldellis, John K., 2016. "Experimental study on the effect of dust deposition on solar photovoltaic panels in desert environment," Renewable Energy, Elsevier, vol. 92(C), pages 499-505.
    17. Kissinger, Gabrielle & Gupta, Aarti & Mulder, Ivo & Unterstell, Natalie, 2019. "Climate financing needs in the land sector under the Paris Agreement: An assessment of developing country perspectives," Land Use Policy, Elsevier, vol. 83(C), pages 256-269.
    18. Satria Tirtayasa & A. Akrim & Ade Gunawan & Emilda Sulasmi & Hastin Umi Anisah, 2021. "Significance of Economic Activities in Environmental Protection: Evidence from a Panel of 4-ASEAN Economies," International Journal of Energy Economics and Policy, Econjournals, vol. 11(2), pages 420-426.
    19. Hardeep Singh & Poonam Rani, 2025. "Adoption and risk‐reducing effects of mixed cropping: Evidence from India," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 47(3), pages 1119-1138, July.
    20. Joseph I. Uduji & Elda N. Okolo-Obasi, 2022. "Gender Sensitive Responses to Climate Change in Nigeria: The Role of Multinationals’ Corporate Social Responsibility in Oil Host Communities," Working Papers 22/041, European Xtramile Centre of African Studies (EXCAS).

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:86:y:2025:i:pe:s1544612325019786. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.