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

• High foreign direct investment lowers climate change vulnerability in developing countries. • Foreign direct investment of developing countries continues to increase. • Foreign direct investment has a time lag and can reduce carbon emissions. • Credit levels and renewable energy function as a mediating mechanism. 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.