New climate policy, resource abundance, and sectoral FDI

Abstract

Motivated by the call to action from the United Nations Climate Change Conference COP 28, this paper analyzes the relationship between a country's level of biocapacity, subsoil assets, and sectoral FDI. A theoretical model is developed, with its main innovation being the consideration that biocapacity and environmental regulation synergically impose costs on firms. The model predicts the existence of FDI pollution heaven effects and highlights the role of biocapacity preservation in mitigating possible FDI resource curse impacts. To test these predictions, we utilize a unique dataset of six sectoral FDI inflows for 99 nations over the period from 1984 to 2019. We explore the effects of biocapacity directly and through its interaction with subsoil assets. Our findings corroborate the predictions of the model, revealing that subsoil resources tend to promote extractives (mining) FDI and hurt non-extractives (non-mining) FDI, whereas biocapacity tends to decrease all types of FDI inflows. Strong evidence in favor of the FDI natural resource curse is observed for low-income and high-income countries. Importantly, our empirical results reinforce that biocapacity protection can play a critical role in mitigating this curse.