Climate change vulnerability-foreign direct investment linkage: Why climate change preparedness matters in Sub-Saharan Africa

Abstract

The sensitivity of Foreign direct investment (FDI) inflows to the level of a region’s vulnerability to climate risks somewhat substantiates the argument that return potentials fundamentally determine FDI location decisions. This makes climate change vulnerability a great challenge to sustainable economic development efforts across the globe, particularly in developing regions. Hence, panel data of 35 sub-Saharan African (SSA) countries between 2006 and 2020 were employed to examine the effect of climate change vulnerability and preparedness on FDI, as well as the exploration of the interaction effect of both climate change indicators on the latter. With the use of Fixed Effects (FE) and Dynamic Two– Step System Generalized Method of Moments (GMM) estimation, findings indicate that FDI inflows could be adversely impacted by climate vulnerability. This strengthens the understanding that as SSA countries become more vulnerable to climate change, inward FDI in the region may be lowered. However, climate preparedness found not to have a negative impact on FDI. Results are consistent with the view that when countries embrace strong innovation support and improved regulatory standards, responsible international investments could be promoted. In addition, the empirical evidence obtained from the interaction of climate vulnerability and readiness reveals that climate preparedness matters in climate vulnerability-FDI nexus, suggesting the increasing relevance of effective climate governance and innovative characteristics of economies in stimulating FDI attraction. It is, therefore, suggested that to mitigate the adverse effect of climate vulnerability on FDI inflows, SSA should actively take measures that would strengthen its economic, governance and social environment.