Does Climate Aid Reduce Perceived Climate Risks to Foreign Direct Investors?

• In Event: Climate Change and Development

Abstract

Climate risks are deterring multinational companies (MNCs) from making foreign investments in low- and middle-income countries. This is worrisome, as foreign direct investment (FDI) is one of the key ingredients for generating economic growth and development. Foreign investors are being deterred in large part by concerns that they will be forced to incur adaptation costs to offset extreme weather driven by climate change. However, they may not withhold investments when host-states absorb those costs for them. Unfortunately, many states in the developing world lack the resources to implement the climate-related measures that could assure investors. The international community has taken steps to fill this gap by providing foreign aid to developing countries with the purpose of shoring up climate resilience. Inflows of climate aid may signal to foreign investors that a potential host-state will have the resources to address key climate risks, leading them to follow through on investments. Against this backdrop, this paper investigates whether climate aid reduces MNCs’ anxieties about investing in climate-vulnerable countries. Results of country-level panel data analysis suggest that climate risks deter MNCs from investing in countries that receive low levels of climate aid, but that this effect vanishes as climate aid inflows rise. These findings indicate that foreign aid donors, such as the World Bank Group and members of the Development Assistance Committee, can play a productive role in ensuring ongoing inflows of FDI to developing countries, even in the presence of climate risks.

Author

• Jonas Gamso, Arizona State University