How can economic instruments of climate policy be directed through foreign direct investment?

Client/Funding Institution

Anniversary Fund of the Oesterreichische Nationalbank

Abstract

This project explores how policymakers can strategically harness foreign direct investment (FDI) to promote innovation and the development of green and environmental technologies in the European Union. It comprises three interconnected work packages and a policy note. The first work package examines the key factors shaping FDI location decisions across regions and industries, emphasising the roles of regulatory distance – particularly through non-tariff measures – and technological proximity between foreign investors and host regions. The second work package investigates the impact of FDI on employment and productivity, both at the firm level and the regional-sector level. It differentiates the effects on domestic firms from those on the entire sector, revealing that the benefits of FDI are most significant when domestic firms possess sufficient absorptive and innovative capacity and are linked to upstream foreign suppliers. The third work package focuses on the diffusion of knowledge and green innovation through multinational corporate networks. It finds that the global innovation profile of an MNE group – especially its parent and affiliates outside the EU – plays a decisive role in driving domestic green patenting, provided there is technological alignment. The accompanying policy note translates these findings into actionable recommendations for aligning FDI attraction with Europe’s innovation and sustainability objectives.

Funded by the Anniversary Fund of the Oesterreichische Nationalbank (Project No. 18800).

Duration

October 2022 - June 2025

wiiw team Leader

Mahdi Ghodsi

wiiw Staff

Chiara Castelli, Mahdi Ghodsi, Francesca Guadagno, Mieke Hein, Branimir Jovanović, Javier Flórez Mendoza

Publications

Keywords: Foreign direct investment, climate change, environmental technology, patenting, knowledge spillovers, productivity growth

Countries covered: EU

Research Areas: International Trade, Competitiveness and FDI


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