Beyond the Haven Hypothesis: Steering Foreign Direct Investment Toward Sustainable Outcomes Through Environmental Governance

ABSTRACT Foreign direct investment (FDI) plays a pivotal role in driving economic growth, yet its environmental consequences demand scrutiny as nations strive for sustainable development. This study investigates how environmental policies mediate the relationship between inward and outward FDI and natural resource availability, focusing on biocapacity in 41 high‐income countries over a 22‐year period. Using a mediation effects methodology, supported by Sobel–Goodman–Aroian and bootstrap resampling tests, we find that environmental policies significantly reduce the negative impact of FDI on biocapacity. Specifically, burden policies, such as taxes and fees, are more effective than subsidies in mitigating FDI's detrimental effects, particularly in democratic contexts. However, both policy types contribute to curbing negative spillovers. A key policy recommendation is to implement strategic environmental assessments to evaluate FDI projects, ensuring alignment with sustainable practices without discouraging investment.