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. Utilizing annual data from 152 countries spanning the period 1996–2019 and employing the panel pooled ordinary least square regressions, we evidence that FDI inflows are lower in countries more vulnerable to climate change. We also observe that 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 primary 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 the economic, institutional, and social environment.