FOREIGN DIRECT INVESTMENT, CLIMATE GOVERNANCE, AND GREEN DEVELOPMENT: EVIDENCE FROM BELT AND ROAD ECONOMIES

Abstract

Foreign direct investment (FDI) is the largest source of external finance for the developing countries that partner with the Belt and Road Initiative (BRI). However, its consequences for climate action and green development remain contested: the pollution-haven view expects capital to migrate to jurisdictions with lax environmental regulation, whereas the pollution-halo view expects foreign firms to transfer cleaner technology and energy-efficiency practices. This study examines whether climate governance moderates, and the renewable energy transition mediates, the effect of FDI on green development in Belt and Road economies. It employs a balanced panel of 40 BRI partner economies over 2006–2025 (800 country-year observations) and a Green Development Index that combines CO2 intensity, energy intensity, forest cover and air-quality exposure, together with a Climate Governance Index built from governance indicators and the stock of climate laws. Panel unit-root, cointegration, ARDL/ECM, bounds, Dumitrescu–Hurlin causality, VECM/VAR, impulse-response, variance-decomposition, mediation, Durbin–Wu–Hausman and two-stage least squares procedures are applied. The results show that a one-percentage-point rise in FDI lowers the Green Development Index by 0.63 points at the mean level of climate governance, but the FDI × governance interaction (0.037, p < 0.01) turns the effect positive once the governance index exceeds about 62; the long-run FDI coefficient in the error-correction model is -2.55 with an adjustment speed of 0.20 per year, and FDI raises the renewable share by 0.49 points, yielding an indirect effect of +0.09 (bootstrap 95% CI [0.03, 0.18]). The findings suggest that FDI is a pollution haven under weak climate governance and a pollution halo under strong climate governance, and that the diffusion of renewable energy partly offsets its direct environmental costs.