Environmental legislative shaping or green competitive advantages? The role of FDI among environmental regulations

Abstract

In this study, our aim was to investigate global patterns across a group of 98 countries spanning a 32-year timeframe, focusing on the connections between different forms of Foreign Direct Investment (FDI) and the emergence of new green fiscal measures within the context of transitioning to green economies. By utilizing machine learning methods and conducting Granger causality analyses, we based our conclusions on two core hypotheses—the impact of environmental regulations on legislation and the competitive advantages of green initiatives—centered on two primary environmental policy types: taxes and subsidies. Our results confirm a reciprocal relationship between FDI metrics and environmental policy indicators, supporting both hypotheses and indicating that FDI can prompt the development of new environmental standards, particularly evident in outward FDI scenarios, which serve as incentives for subsidy programs. Furthermore, the context of environmental fiscal policies can shape the direction of international financial flows, underscoring the importance for policymakers to endorse targeted strategies that not only attract FDI but also foster the sustainability of inbound foreign direct investments.