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Sensing the heat: Climate change vulnerability and foreign direct investment inflows

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  • Shear, Falik
  • Ashraf, Badar Nadeem
  • Butt, Shazaib

Abstract

We investigate whether climate change vulnerability determines foreign direct investment (FDI) inflows. We reason that multinational firms foresee a higher climate change vulnerability of host-country a locational disadvantage while making FDI allocation decisions. Utilizing annual data from 152 countries spanning the period 1996–2019 and employing the panel pooled ordinary least square regressions, we evidence that FDI inflows are lower in countries more vulnerable to climate change. We also observe that FDI inflows are only sensitive to climate-related risks in high- and middle-income countries, but not in low-income countries where the market size is a primary driver of FDI inflows. Moreover, we also find that host countries may weaken the adverse effects of climate change vulnerability on FDI inflows by strengthening the economic, institutional, and social environment.

Suggested Citation

  • Shear, Falik & Ashraf, Badar Nadeem & Butt, Shazaib, 2023. "Sensing the heat: Climate change vulnerability and foreign direct investment inflows," Research in International Business and Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:riibaf:v:66:y:2023:i:c:s0275531923001319
    DOI: 10.1016/j.ribaf.2023.102005
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    1. Chen, Xinming & Fang, Tong, 2024. "Temperature anomalies and foreign direct investment: City-level evidence from China," International Review of Financial Analysis, Elsevier, vol. 91(C).
    2. Zhao, Congyu & Dong, Kangyin & Nepal, Rabindra & Goutte, Stéphane, 2026. "From aid to equality: Uncovering the role of climate finance funds in inhibiting carbon inequality," International Review of Economics & Finance, Elsevier, vol. 105(C).
    3. Li, WeiWei & Huang, Chia-Hsing, 2025. "Firm internationalization and asset-liability maturity mismatch," Research in International Business and Finance, Elsevier, vol. 77(PB).
    4. Hunjra, Ahmed Imran & Bouri, Elie & Azam, Muhammad & Azam, Rauf I & Dai, Jiapeng, 2024. "Economic growth and environmental sustainability in developing economies," Research in International Business and Finance, Elsevier, vol. 70(PA).
    5. Liu, Tie-Ying & Lin, Ye, 2023. "Does global warming affect unemployment? International evidence," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 991-1005.
    6. Uddin, Mirza Md Moyen & Sharif, Taimur & Islam, Abe Reza Mohammad & Abedin, Mohammad Zoynul, 2024. "Moderating impact of FDI on the growth-environment nexus in the pre-COVID-19 eras," Research in International Business and Finance, Elsevier, vol. 67(PA).
    7. Fentaw Leykun, 2024. "Climate change and external debt vulnerability: the case of Sub-Saharan Africa," Journal of Innovation and Entrepreneurship, Springer, vol. 13(1), pages 1-27, December.
    8. Chow, William W. & Fung, Michael K., 2025. "Relative ESG positions among OECD countries in the presence of international competition for FDI inflow: A gravity model perspective," Research in International Business and Finance, Elsevier, vol. 76(C).

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