The effect of foreign direct investment flows on mitigating climate change vulnerability in developing countries

Jinan Jia; Renhua Zhang; Guangpu Zhao; Zihao Zhao; Feiya Chen

doi:10.1016/j.frl.2025.108724

The effect of foreign direct investment flows on mitigating climate change vulnerability in developing countries

Jinan Jia, Renhua Zhang, Guangpu Zhao^*, Zihao Zhao, Feiya Chen

^*Corresponding author for this work

School of Energy and Environment

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

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Abstract

Foreign aid plays a crucial role in helping developing countries address climate change. This paper employs data from 100 developing countries over 2016-2022, integrating a two-way fixed effects model with mediation analysis to methodically ascertain the mechanisms through which foreign direct investment (FDI) affects climate change vulnerability (CV). The findings suggest that FDI inflows significantly reduce CV, with a 1% rise in FDI resulting in 0.9% decline in CV. A thorough mechanism analysis reveals that FDI indirectly mitigates vulnerability through two key pathways: increasing domestic credit (DC) and promoting renewable energy (RE). It has been demonstrated that each incremental unit of DC and RE results in a reduction of CV by 0.9% and 0.6% respectively. These findings indicate that developing countries can enhance their climate resilience by directing foreign investment into the credit and energy sectors simultaneously. © 2025 The Author(s).

Original language	English
Article number	108724
Number of pages	8
Journal	Finance Research Letters
Volume	86
Issue number	Part E
Online published	21 Oct 2025
DOIs	https://doi.org/10.1016/j.frl.2025.108724
Publication status	Published - Dec 2025

Funding

This work was supported by Hebei Natural Science Foundation (Grant No. G2024402002), Hebei Social Science Foundation Project (Grant No. HB24ZT036), Science Research Project of Hebei Education Department (Grant No. SQ2024132), Hebei Culture and Art Science Planning and Tourism Research Project (Grant No. HB25-QN072), Sports Technology Research Project of Hebei Province (Grant No. 2025CY27) and Handan Philosophy and Social Science Planning Project (Grant No. 2024119).

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 1 No Poverty
SDG 7 Affordable and Clean Energy
SDG 13 Climate Action
SDG 17 Partnerships for the Goals

Research Keywords

Foreign aid
Climate change
Developing country
Climate risk vulnerability

Publisher's Copyright Statement

This full text is made available under CC-BY-NC 4.0. https://creativecommons.org/licenses/by-nc/4.0/

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title = "The effect of foreign direct investment flows on mitigating climate change vulnerability in developing countries",

abstract = "Foreign aid plays a crucial role in helping developing countries address climate change. This paper employs data from 100 developing countries over 2016-2022, integrating a two-way fixed effects model with mediation analysis to methodically ascertain the mechanisms through which foreign direct investment (FDI) affects climate change vulnerability (CV). The findings suggest that FDI inflows significantly reduce CV, with a 1% rise in FDI resulting in 0.9% decline in CV. A thorough mechanism analysis reveals that FDI indirectly mitigates vulnerability through two key pathways: increasing domestic credit (DC) and promoting renewable energy (RE). It has been demonstrated that each incremental unit of DC and RE results in a reduction of CV by 0.9% and 0.6% respectively. These findings indicate that developing countries can enhance their climate resilience by directing foreign investment into the credit and energy sectors simultaneously. {\textcopyright} 2025 The Author(s).",

keywords = "Foreign aid, Climate change, Developing country, Climate risk vulnerability",

author = "Jinan Jia and Renhua Zhang and Guangpu Zhao and Zihao Zhao and Feiya Chen",

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T1 - The effect of foreign direct investment flows on mitigating climate change vulnerability in developing countries

AU - Jia, Jinan

AU - Zhang, Renhua

AU - Zhao, Guangpu

AU - Zhao, Zihao

AU - Chen, Feiya

PY - 2025/12

Y1 - 2025/12

N2 - Foreign aid plays a crucial role in helping developing countries address climate change. This paper employs data from 100 developing countries over 2016-2022, integrating a two-way fixed effects model with mediation analysis to methodically ascertain the mechanisms through which foreign direct investment (FDI) affects climate change vulnerability (CV). The findings suggest that FDI inflows significantly reduce CV, with a 1% rise in FDI resulting in 0.9% decline in CV. A thorough mechanism analysis reveals that FDI indirectly mitigates vulnerability through two key pathways: increasing domestic credit (DC) and promoting renewable energy (RE). It has been demonstrated that each incremental unit of DC and RE results in a reduction of CV by 0.9% and 0.6% respectively. These findings indicate that developing countries can enhance their climate resilience by directing foreign investment into the credit and energy sectors simultaneously. © 2025 The Author(s).

AB - Foreign aid plays a crucial role in helping developing countries address climate change. This paper employs data from 100 developing countries over 2016-2022, integrating a two-way fixed effects model with mediation analysis to methodically ascertain the mechanisms through which foreign direct investment (FDI) affects climate change vulnerability (CV). The findings suggest that FDI inflows significantly reduce CV, with a 1% rise in FDI resulting in 0.9% decline in CV. A thorough mechanism analysis reveals that FDI indirectly mitigates vulnerability through two key pathways: increasing domestic credit (DC) and promoting renewable energy (RE). It has been demonstrated that each incremental unit of DC and RE results in a reduction of CV by 0.9% and 0.6% respectively. These findings indicate that developing countries can enhance their climate resilience by directing foreign investment into the credit and energy sectors simultaneously. © 2025 The Author(s).

KW - Foreign aid

KW - Climate change

KW - Developing country

KW - Climate risk vulnerability

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DO - 10.1016/j.frl.2025.108724

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JO - Finance Research Letters

JF - Finance Research Letters

IS - Part E

M1 - 108724

ER -

The effect of foreign direct investment flows on mitigating climate change vulnerability in developing countries

Abstract

Funding

UN SDGs

Research Keywords

Publisher's Copyright Statement

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