Sectoral Foreign Direct Investment, Institutional Quality, and Environmental Sustainability: Evidence from CEE countries

This paper examines the relationship between sectoral foreign direct investment, institutional quality, and environmental sustainability in Central and Eastern European countries. The analysis is based on a balanced panel dataset covering Bulgaria, the Czech Republic, Croatia, Poland, Romania, Slovakia, and Slovenia over the period 2010-2023. Environmental sustainability is measured using two indicators: ecological footprint and CO2 emissions. The study considers both total FDI and sectoral FDI in mining and quarrying, manufacturing, electricity and gas, construction, and services. Institutional quality is captured through a composite index constructed from control of corruption, government effectiveness, political stability, regulatory quality, rule of law, and voice and accountability. Using fixed-effects panel models with country and year effects, the paper investigates whether institutional quality moderates the environmental impact of FDI. The results suggest that the relationship between FDI and environmental sustainability differs across environmental indicators and sectors. Total FDI is negatively associated with CO2 emissions in the baseline model, while its relationship with ecological footprint is not statistically significant. The moderation results indicate that institutional quality plays a sector-specific role, particularly in the CO2 models, where stronger institutions reduce the environmental impact of total FDI, manufacturing FDI, and services FDI. These findings highlight the importance of considering both the sectoral composition of FDI and institutional conditions when assessing the environmental implications of foreign investment in CEE economies.