Impact of Foreign Direct Investment on Green Innovation: Evidence from China’s Provincial Panel Data

Abstract

The last couple of decades have witnessed growing interest in the academic literature in the conciliation of finance and sustainable development. Foreign direct investment (FDI) faces increasing pressure from both host and home country towards adoptinsg sustainable approaches. Such solutions can be green innovation (GI) for climate change, environmental risks, green processes and products that allow tracking the carbon footprint, as well as many other green technologies. Based on the macro-level data of 31 provinces in China from 2003 to 2020, this paper employed policy environment (PE) and marketization level (ML) as moderating variables to further investigate the impact of FDI on GI. Our results show the following: (1) FDI has a significant positive and dynamic evolution feature of diminishing marginal efficiency on GI. (2) The heterogeneity analysis of regional regression shows that FDI significantly increases GI in the eastern and western regions. In contrast, FDI in the central region inhibits GI but not significantly. (3) Both PE and ML can positively moderate the impact of FDI on GI. Furthermore, our empirical results of the robustness test of 2SLS and GMM are highly consistent with the main test. The conclusions of this paper provide policy implications for local governments to fully and effectively utilize foreign capital for green innovation activities.