WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Foreign direct investment (FDI) has become a driver of growth in both developed and developing countries, as it enables the transfer of know-how and advanced technologies to host economies. This policy note discusses how FDI can effectively support innovation and green growth within the European Union (EU). It focuses on the role of regulatory harmonisation and technological alignment as factors that can significantly influence the location decisions and effectiveness of FDI. Similarly, as spill-overs from foreign affiliates substantially enhance local innovation capabilities, particularly in green technologies, we argue in favour of policies enhancing domestic absorptive capacity and of policy mechanisms that can systematically integrate sustainability criteria into FDI screening processes. Aligning investment policies with regional technological strengths and green transition goals will enable the EU to leverage FDI strategically for sustainable economic growth and climate resilience.