Climate risks and foreign direct investment in developing countries: the role of national governance

This study investigates to what extent climate risks can affect foreign direct investment (FDI) inflows to developing countries and how their governments may respond to this effect. Using national level data between 2004 and 2018 for 108 countries, we estimate the impacts of two types of climate risks, namely physical risk measured by a vulnerability index and transition risk measured by carbon dioxide damage. The results show that both climate risks reduce FDI inflows during the sample period. We further find that better national governance can alleviate these negative impacts. These findings provide important implications to authorities that improving governance can effectively help these countries cope with climate challenges.