The Impact of Local Government ESG Performance on Foreign Direct Investment

In the complex and ever-changing international economic environment, stabilizing existing foreign investment and promoting new inflows are key priorities for government administrations. The sustainable development philosophy embodied in ESG (Environment, Social Responsibility and Governance) practices provides entities with sufficient competitiveness and attracts the attention of international investors. Using panel data of 31 provinces in China from 2015 to 2020, this study employs a two-way fixed-effects model to examine the impact of local government ESG performance on FDI (foreign direct investment). The results indicate that good ESG performance significantly enhances foreign investment inflows and the mechanism test confirmed that optimizing the business environment and improving total factor productivity are crucial channels through which ESG practices attract foreign investment. Further analysis revealed that the positive effect of ESG performance on stabilizing foreign investment is more pronounced in regions with low resource dependence, and a developed digital economy environment amplifies the positive impact of ESG activities on foreign investment. However, ESG practices widen the FDI gap across regions, exhibiting a distinct “Matthew effect”. Consequently, this paper proposes several policy recommendations, such as improving local government ESG information disclosure and evaluation systems, enhancing ESG performance to create locational advantages, and formulating strategic plans tailored to local conditions.