Climate Change Impact on Foreign Direct Investment Inflows : A Dynamic Assessment at the Global, Regional and Economic Level

Climate and environment-related international private finance flows have considerably risen since the early 1990s. The evidence on both sectoral sensitivities and increased climate-relevant investments suggests a potential link between international investment flows and climate variables, which to date remains largely unexplored. This paper examines how climate change, defined by temperature and precipitation changes, influences aggregate Foreign Direct Investment (FDI) inflows across regions and economies. We employ ARDL-based mean-group type estimators on a panel data from 1995 to 2014 covering 80 countries. We find that FDI flows are sensitive to changes in temperature and precipitation. Temperature has a long-run negative impact on world aggregate FDI flows, while precipitation shows a positive impact. Findings suggest mostly long-run and heterogeneous impacts of temperature and precipitation changes across regions. Findings further show that in the long-run temperature changes decrease FDI flows in developing countries, but increase FDI flows in developed economies. This analysis could provide a new perspective to the on-going efforts of financing climate impact mitigation and adaptation. They could also offer information about rethinking global FDI policies in the context of climate change