Towards environmental impact of inward foreign direct investment: the moderating role of varieties of democracy

Purpose—This paper aims to clarify the relationship between foreign direct investment (FDI), democracy, and carbon intensity. It examines the influence of different types of democracy on the relationship between inward FDI and carbon intensity. For this purpose, it uses five varieties of democracy, including a composite democracy indicator, as moderating variables.

Design/methodology/approach—This study applies the fixed-effects panel quantile regression approach, which considers unobserved heterogeneity and distributional heterogeneity using panel data from 160 countries during 1990–2020. To check the robustness of the results, an event study is conducted across various sub-samples of democracy, taking into account sudden changes in the volume of inward FDI.

Findings – The results show that FDI has a significantly negative impact on the carbon intensity of the host country in the upper quantiles. In general, different types of democracy have a significant positive impact on carbon intensity across different quantiles. After considering the other factors, including industry intensity, trade openness, green technology, fossil fuel dependency and International Environmental Agreements, there is evidence that all types of democracy moderate the relationship between FDI and carbon intensity, thereby supporting the halo effect hypothesis. In addition, the interaction effects have a significant negative impact on carbon intensity of low- and high-carbon-intensive countries.

Originality/value – This paper offers several contributions to the literature on the effect of FDI and democracy on carbon intensity. This study overcomes the limitations related to the conceptualisation and measurement of democracy found in the literature. While prior research has predominately concentrated on how democracy promotes the selection of FDI host-country locations, this study seeks to answer whether democracy type affects inward FDI, thus contributing to improving carbon intensity. Furthermore, this paper separately analyses the effect of interaction on carbon intensity in different countries with different carbon intensity levels.