On the Path to Green Economy: Can Green Foreign Direct Investment Accelerate the Success of Climate Action?

ABSTRACT Today, emerging economies that struggle to cope with environmental problems often face challenges in implementing effective climate action policies. A significant portion of environmental pollution in these countries is caused by foreign direct investment. Meanwhile, the existing environmental economics literature remains silent on the environmental implications of green foreign direct investment (GFDI). This study examines the impact of GFDI on environmental sustainability by incorporating Fourier terms into the panel nonlinear ARDL method. Therefore, this new empirical study extends the literature on the STIRPAT model by examining the impact of GFDI on environmental sustainability in seven developing countries (E7) and South Africa. The empirical assessment revealed that positive GFDI shocks significantly enhance environmental quality, while negative shocks undermine environmental sustainability. Hence, attracting more GFDI to sustain its pleasant effects is expedient. The E7+ should provide more incentives to foreign investors who promote greenfield projects, given the environmental quality‐enhancing attributes of GFDI.