The impact of official development assistance and foreign direct investment upon the consolidation of green economies in Small Island Developing States (SIDS)

Abstract Small Island Developing States (SIDS) represent one of the most climate-vulnerable yet empirically understudied country groups in the global energy transition literature. Despite their disproportionate exposure to climate change and their structural dependence on foreign capital flows, the effects of official development assistance (ODA) and foreign direct investment (FDI) on their renewable energy trajectories remain poorly understood. This study examines these effects using data from 37 SIDS between 1995 and 2019, estimated through feasible generalized least squares and panel-corrected standard errors techniques. Our central finding is paradoxical: both ODA and FDI enhance economic productivity but consistently fail to promote renewable energy consumption, suggesting that foreign capital flows in SIDS are structurally oriented towards Gross Domestic Product (GDP) growth rather than green transition. This result is consistent with the Pollution Haven Hypothesis for FDI and with donor–recipient misalignment for ODA, and is compounded by fossil fuel lock-in and adaptation–mitigation trade-offs that suppress renewable energy adoption even in the most climate-vulnerable contexts. The apparent improvement in renewable energy productivity observed alongside these flows reflects relative decoupling rather than genuine decarbonization, as GDP growth outpaces renewable energy scaling without any underlying transformation of the energy mix. These findings underscore the need for earmarked climate finance within ODA frameworks, conditional investment treaties linking tax incentives to renewable energy use and vulnerability-weighted international finance mechanisms tailored to the structural realities of SIDS.