Sensing the Heat : Climate Change Vulnerability and Foreign Direct Investment Inflows

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. Consistent with our expectation, we evidence that FDI inflows are lower in countries that are more vulnerable to climate change. In further analysis, we observe 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 main 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 economic, institutional and social environment