Từ khóa: Foreign Direct Investment FDI, Environmental, Social, and Governance ESG, OECD countries, Sustainable investment, Carbon emissions, Panel data analysis, Investment sustainabili
INTRODUCTION
OVERVIEW
Sustainable investment has gained significant traction in global finance over the past decade, driven by a growing recognition of the importance of environmental, social, and governance (ESG) factors in investment choices A 2020 report by the Global Sustainable Investment Alliance (GSIA) revealed that sustainable investment strategies managed a total of USD 35.3 trillion, representing 36% of all professionally managed assets worldwide Furthermore, the COVID-19 pandemic underscored the necessity for sustainable development, as companies and nations with strong ESG performance exhibited greater resilience to economic and social disruptions.
Investors today are increasingly considering not just financial returns but also the social and environmental impacts of their investments Research indicates that integrating ESG factors into investment decisions can enhance long-term performance and mitigate risks However, most studies have concentrated on corporate or industry levels, neglecting the influence of national ESG performance on attracting Foreign Direct Investment (FDI) This oversight highlights a gap in understanding how ESG considerations affect investor location choices.
Member countries of the OECD play a vital role in fostering foreign direct investment (FDI) and setting standards for sustainable investment However, disparities in environmental, social, and governance (ESG) performance among these countries can significantly influence their attractiveness to FDI For instance, nations with stronger governance scores tend to draw more FDI due to their transparent and stable business environments Therefore, examining the link between national ESG performance and FDI flows is crucial for understanding the dynamics of global investment in today's sustainability-focused landscape.
Foreign Direct Investment (FDI) is vital for economic growth, job creation, and technology transfer in host countries However, recent years have seen significant fluctuations in global FDI flows The United Nations Conference on Trade and Development (UNCTAD) reported a 35% decline in global FDI in 2020 due to the COVID-19 pandemic, with total investments falling to USD 1 trillion, marking the lowest level since 2005 This downturn poses a significant challenge for nations that depend on FDI to meet their Sustainable Development Goals (SDGs).
ESG factors are increasingly crucial in investment decisions for multinational companies, with a 2021 survey by Ernst & Young revealing that 74% of executives would reject investment projects due to significant ESG risks, regardless of appealing financial aspects This highlights that a nation's ESG performance not only influences its reputation but also directly affects its capacity to attract foreign investment.
Understanding the link between a country's ESG performance and FDI flows is essential for policymakers to attract investment while promoting sustainable development This research addresses a gap in the literature by examining how ESG factors impact FDI into OECD countries The insights gained will be vital for shaping policy and sustainable development strategies in an evolving global economy.
RESEARCH OBJECTIVES
This study investigates the impact of countries' ESG (Environmental, Social, and Governance) performance on Foreign Direct Investment (FDI) inflows within OECD nations It seeks to elucidate the connection between national-level ESG factors and the capacity to attract FDI, ultimately fostering sustainable investment and aiding countries in reaching their sustainable development goals.
From the general objective, the thesis defines the specific research objectives as follows:
Assess the influence of each ESG component on foreign direct investment (FDI) flows by examining the distinct effects of environmental, social, and governance factors This analysis aims to determine which of these components exerts the most significant impact on FDI, providing valuable insights for investors and policymakers.
To ensure the accuracy and reliability of research findings, it is essential to consider various macroeconomic factors that influence the relationship between Environmental, Social, and Governance (ESG) criteria and Foreign Direct Investment (FDI) Key variables such as Gross Domestic Product (GDP), inflation rates, and trade openness should be controlled for in the analysis.
Propose policy recommendations for OECD countries: Based on the research findings, provide strategies and policies to improve ESG performance to attract FDI and promote sustainable development.
RESEARCH QUESTIONS
To address the objectives outlined, the thesis aims to answer the following research questions:
First question: What factors, including a country's ESG performance, influence
FDI flows into industries in OECD countries?
Second question: What is the impact of the three ESG factors: environmental, social, and governance on FDI investment decisions, and which factor has the strongest impact?
Third question: What governance implications can be proposed to enhance
Foreign Direct Investment (FDI) in OECD countries?
SUBJECTS AND THE SCOPE
The thesis studies the relationship between the ESG performance of countries and FDI flows into industries in OECD countries
The Organisation for Economic Co-operation and Development (OECD) comprises 36 member countries, including the United States, United Kingdom, Germany, Japan, and Australia, among others This selection is based on the availability and completeness of data, ensuring consistency in research The OECD is recognized for its reliable collection and analysis of economic and social data, which allows for effective comparisons across nations By focusing on these member countries, the study accurately captures global economic trends within both developed and emerging economies.
The study spans from 2012 to 2022, chosen for its relevance and comprehensiveness, marking a decade of economic recovery post the 2008-2009 financial crisis and the increasing significance of ESG factors in investment decisions Key events during this period, including the 2015 Paris Agreement on climate change and the United Nations' Sustainable Development Goals (SDGs), have notably shaped the investment strategies of nations and businesses Extending the analysis to 2022 enables a thorough examination of the impacts stemming from the COVID-19 pandemic.
19 pandemic and economic recovery measures, providing a comprehensive view of FDI trends and ESG performance in a rapidly changing global context
This study analyzes foreign direct investment (FDI) data by industry sourced from the OECD, alongside national-level environmental, social, and governance (ESG) data from the World Data Bank Additionally, it incorporates macroeconomic data from the World Development Indicators (WDI) and the ESG Data Portal to provide a comprehensive overview.
METHODOLOGY
This study utilizes secondary data from the OECD on foreign direct investment (FDI) flows by industry, alongside national-level environmental, social, and governance (ESG) performance data from the World Bank and macroeconomic indicators from the World Development Indicators (WDI), including GDP, export and import volumes, Human Development Index (HDI), and Consumer Price Index (CPI) The research aims to analyze the relationship between ESG performance and FDI flows through descriptive statistical analysis to identify trends and characteristics within the data A multivariate regression model and panel data analysis will be employed to account for country-specific and time-specific factors, while interaction models or sample splitting will assess homogeneity and differences across industries Data processing and analysis will be conducted using statistical software such as Stata, R, or Python.
RESEARCH STRUCTURE
The main content of the research thesis consists of five chapters, including:
Chapter 1 provides an overview of the research problem, including the reasons for choosing the research topic, the research objectives, scope, and subjects, the research methods, and the practical significance of the study
Chapter 2: Theoretical basis and literature review
Chapter 2 presents the theoretical foundation of FDI, summarizes previous research models on the impact of ESG on FDI, aiming to build a foundation for the research model presented in Chapter 3
Chapter 3: Research model and methodology
Chapter 3 builds upon the theoretical framework established in Chapter 2 by examining the research variables, data, model, process, and methods employed to achieve results that meet the defined objectives.
Chapter 4 will present the calculated results, hypothesis test results, and data tables, analyzing and discussing those results in relation to the research problem overview It will also compare the study’s findings with results from previous empirical research to highlight the new contributions of the study
This chapter aims to encapsulate the essential elements of the research, including the key findings, objectives, questions, and methodologies employed by the author It will also highlight the contributions of the study, offer recommendations, and propose actionable solutions while addressing the limitations encountered, such as time constraints and data availability.
RESEARCH CONTRIBUTIONS
This study significantly enhances the understanding of Foreign Direct Investment (FDI) by integrating sustainable factors, particularly environmental, social, and governance (ESG) elements, within the framework of contemporary globalization.
THEORETICAL BASIS AND LITERATURE REVIEW 8 2.1 THEORETICAL BASIS ABOUT FOREIGN DIRECT INVESTMENT (FDI)
THEORETICAL BASIS ABOUT ESG
ESG (Environmental, Social, and Governance) is a globally recognized framework for evaluating the sustainability and social responsibility of businesses, increasingly influencing investor and stakeholder decision-making This model encompasses three key components: the Environment, which emphasizes the protection and preservation of natural resources; Social, focusing on labor rights, community impact, and workplace safety; and Governance, which pertains to transparency, ethical practices, and effective risk management.
The Environmental (E) factor of ESG focuses on minimizing businesses' negative impacts on nature, promoting sustainable resource use, and reducing greenhouse gas emissions and pollution while protecting biodiversity Companies today confront challenges like climate change and unsustainable resource extraction, making effective environmental management crucial for mitigating these impacts and enhancing economic benefits through cost savings and operational efficiency Organizations with strong environmental performance often implement initiatives to reduce carbon emissions, conserve energy, and optimize production to minimize waste Research by Friede et al (2015) indicates that companies prioritizing environmental protection not only mitigate climate-related risks but also capitalize on opportunities in green industries, including renewable energy and eco-friendly technologies.
The Social (S) factor of ESG emphasizes the importance of relationships between businesses and their stakeholders, including employees, local communities, customers, and partners Key social considerations encompass labor rights, workplace safety, gender diversity, corporate social responsibility, and the overall impact on communities ESG frameworks encourage companies to uphold labor standards, foster safe work environments, and act responsibly within their communities Research indicates that businesses with robust social policies, promoting equality and career development, often experience enhanced financial performance According to Edmans (2011), a positive work environment and high employee satisfaction lead to greater engagement from both employees and customers, ultimately driving productivity and profitability Furthermore, effective corporate social responsibility initiatives enable businesses to cultivate strong community relationships, contributing to long-term sustainable value.
The Governance (G) factor in ESG is crucial for ensuring transparency, fairness, and ethical decision-making in companies Effective governance controls risks, fosters investor trust, and promotes a positive work environment Key governance elements include board structure, risk management, profit distribution policies, and financial regulations Research by Gompers et al (2003) indicates that companies with strong governance systems enjoy higher market values and reduced legal and financial risks, making them more attractive to long-term investors who prioritize stability and ethical compliance.
Implementing the ESG model significantly enhances a company's reputation and trust among stakeholders, as businesses with robust ESG strategies not only comply with regulations but also showcase their commitment to sustainability, thereby attracting investors, customers, and partners Research indicates that companies with high ESG scores achieve better financial performance due to effective management of environmental and social risks, making ESG an essential factor in investment decisions for both financial institutions and individual investors Moreover, firms with strong ESG practices are better positioned to mitigate financial risks and ensure long-term stability and growth, particularly in light of pressing issues like climate change and social inequality By optimizing risk management and capitalizing on sustainable trends, businesses can reduce operational costs and expand their markets through the development of eco-friendly and community-oriented products and services.
In the realm of Foreign Direct Investment (FDI), Environmental, Social, and Governance (ESG) criteria significantly influence the selection of countries and sectors for investment International investors are increasingly favoring nations and companies that uphold transparent ESG standards, as these entities often encounter reduced legal, environmental, and social risks This alignment with robust environmental and social policies enables companies to sustain their operations over time Research by Krüger (2015) indicates that firms with high ESG standards effectively minimize financial and legal risks, ultimately enhancing shareholder value Emphasizing ESG in FDI not only mitigates risks but also bolsters the long-term sustainability and success of investments.
RELATED THEORY
Raymond Vernon's Product Life Cycle (PLC) theory (1966) outlines the stages of a product's journey from development to market removal, emphasizing that new products are often created in developed countries with advanced technology and quality standards As products mature and become standardized, companies shift production to lower-cost countries to maximize profits While the PLC theory traditionally centers on economic factors, contemporary considerations increasingly incorporate environmental, social, and governance (ESG) factors, which are essential in influencing the product life cycle today.
In the Product Life Cycle (PLC), Environmental, Social, and Governance (ESG) factors significantly influence strategic business decisions and can either extend or shorten the product life cycle, ultimately generating long-term value for both companies and communities At each stage of the PLC, the impact of ESG is substantial, shaping the trajectory of products and their market success.
Product Development and Introduction Stage
The product development and introduction phase is the initial stage of the Product Life Cycle (PLC), where businesses invest significantly in research and development (R&D) to create innovative products and establish brand awareness During this phase, products are often manufactured in technologically advanced countries that prioritize quality and strict standards Environmental, Social, and Governance (ESG) factors are crucial, as companies focus on reducing greenhouse gas emissions, utilizing sustainable materials, and designing eco-friendly products to appeal to environmentally conscious consumers Additionally, social considerations, such as labor conditions and supply chain transparency, are increasingly important For example, companies like Apple and Tesla have integrated ESG principles early in their product development, with Apple committing to 100% renewable energy in its manufacturing and minimizing carbon emissions, thereby enhancing its brand image among sustainability-focused consumers.
As products reach maturity, they become standardized and focus on cost optimization, often leading businesses to relocate manufacturing to countries with lower labor costs However, environmental, social, and governance (ESG) factors play a crucial role in this decision, especially with stricter environmental regulations Adhering to ESG standards is essential, as it influences a company’s cost strategy and public image Companies must navigate challenges in maintaining environmental and social standards when moving production to developing countries, ensuring compliance with regulations, fair working conditions, and the protection of workers' rights, which are vital for both social responsibility and consumer perception.
As products enter the decline stage, businesses must decide whether to innovate, restructure, or remove them from the market, especially when they no longer meet market demands or fail to comply with environmental and social standards While traditional Product Life Cycle (PLC) theory suggests discontinuing unprofitable products, modern considerations of Environmental, Social, and Governance (ESG) factors can heavily influence these decisions Products that lack environmental sustainability may encounter consumer boycotts or stricter regulations, prompting companies to innovate by enhancing recyclability, utilizing sustainable materials, or reducing environmental impact Notable examples include Apple and IKEA, which have successfully extended their product life cycles and maintained customer loyalty by improving recyclability and minimizing plastic usage.
2.3.2 HORIZONTAL AND VERTICAL FDI THEORY
Investment capital can be categorized into private investment capital, where individuals invest in other entities, and contributions from economic organizations, which involve business entities investing to establish new enterprises abroad Foreign Direct Investment (FDI) is primarily classified into two types based on the investors' intent: Horizontal FDI (HFDI) and Vertical FDI (VFDI), each serving different objectives and operational methods.
Horizontal Foreign Direct Investment (FDI) involves a company expanding its operations into a foreign country within the same industry The main goal of this strategy is to access new markets for its products, which can help lower import and export costs, as well as take advantage of reduced labor and resource expenses in the host country compared to its home country.
Choi and Harrigan (2003) highlighted that horizontal foreign direct investment (FDI) focuses on producing goods within the host country to minimize trade costs and better serve foreign consumers For instance, a European clothing brand may establish factories in countries like China or Vietnam to leverage lower labor costs, thereby improving competitiveness in the global market Additionally, Aizenman and Noy (2006) emphasized that contemporary horizontal FDI is influenced not only by economic motivations but also by social and environmental responsibilities.
Companies tend to invest in nations that uphold ESG (Environmental, Social, and Governance) standards akin to their own to reduce legal risks and protect their brand image For example, a renewable energy firm from a developed country is likely to target investments in regions with favorable policies for renewable and sustainable energy, ensuring compliance with essential environmental and social standards.
Vertical FDI involves a company's investment in various activities along the value chain, which may include different sectors or stages within the same sector, with the goal of extending its supply chain Companies pursuing vertical FDI aim to enhance control over production inputs, optimize their supply chains, and reduce production costs.
Vertical foreign direct investment (FDI) encompasses complementary factors between domestic and foreign companies, as noted by Braconier and Ekholm (2000) This type of investment may involve upstream activities, such as raw material production, or downstream activities, like product distribution For instance, textile manufacturers often invest in cotton-producing countries to source fibers and subsequently set up weaving and dyeing factories in nations with lower labor costs, thereby enhancing the efficiency of their supply chain.
Vertical foreign direct investment (FDI) is significantly shaped by environmental, social, and governance (ESG) factors, as noted by Aizenman and Noy (2006) To reduce risks associated with labor rights violations and environmental harm, companies are compelled to choose partners and suppliers that uphold high ESG standards This necessity is illustrated by the findings of Vuong Quan Hoang et al.
(2023) describes major technology firms investing in mineral extraction in developing countries, where environmental protection and labor rights regulations are becoming increasingly stringent
Integrating ESG standards into foreign direct investment (FDI) offers legal advantages while bolstering a company's sustainable development strategy This approach not only enhances brand value but also fosters trust among investors, customers, and the community.
To explore the relationship between ESG (Environmental, Social, and Governance) and FDI (Foreign Direct Investment ), this study employs Dunning's
The Eclectic Theory, established in 1977, serves as a foundation for discussions on foreign investment, positing that companies pursue such investments when they possess three key advantages: Ownership (O), Location (L), and Internalization (I).
Ownership advantage encompasses the unique assets that a country or company holds, including advanced technology, branding, management expertise, and patents In today's landscape, Environmental, Social, and Governance (ESG) factors have become crucial components of this advantage Companies investing in OECD countries gain ownership advantage through sustainable strategies, eco-friendly policies, social protection measures, and adherence to robust governance standards These factors enhance brand reputation and value, making it easier for companies to attract both investors and customers.
FACTORS AFFECTING FOREIGN DIRECT INVESTMENT (FDI) 19 1 Environmental Factors (E)
The Environmental Factors (E) in this study encompass variables related to climate risks and carbon emission levels, specifically measured through national-level CO₂ emissions data from the World Data Bank Per capita CO₂ emissions serve as an indicator of environmental quality, revealing that in developing countries, poorer environmental quality inversely correlates with Foreign Direct Investment (FDI) attraction; thus, worse environmental conditions may lead to increased FDI inflows Research by Michelde et al (2023) confirms that carbon emissions negatively and significantly affect FDI inflows, while a study by Niranjan Chipalkatti et al (2021) across 161 countries further establishes that higher per capita CO₂ emissions correlate with greater FDI inflows, potentially due to various economic incentives.
The "pollution haven" phenomenon occurs when stricter environmental regulations in developed countries prompt pollution-heavy manufacturing industries to relocate to developing nations with looser standards This transfer of polluting industries through Foreign Direct Investment (FDI) exacerbates environmental degradation in these lower-income countries, leading to an increase in FDI flows into them while simultaneously decreasing investments in higher-middle-income nations (Opoku et al., 2022) Nevertheless, some research suggests that there may be no direct causal link between carbon emissions, environmental quality, and FDI (Jingjing Chen, 2022).
The Social Factors (S) in this study are assessed using the Human Development Index (HDI), which is based on Amartya Sen's "capabilities" approach to human prosperity This approach prioritizes ultimate goals, such as achieving a decent standard of living, over mere economic indicators like per capita income The HDI encapsulates essential capabilities for social development, focusing on three key areas: access to healthcare, education, and goods and services Data for the Social Factors (S) are sourced from national-level statistics provided by the World Data Bank.
The Human Development Index (HDI) encompasses key components like years of schooling for both adults and children, life expectancy at birth, and per capita national income Despite the complexities involved in measuring social development, the HDI is widely acknowledged as a crucial indicator of a nation's social progress and serves as an official metric for evaluating advancements toward the Sustainable Development Goals (SDGs).
Social factors are crucial in both middle-income and high-income countries, emphasizing the importance of investing in social effectiveness through institutional development, human capital accumulation, and human development Research indicates that increased human capital, marked by advancements in education, life expectancy, and economic welfare, leads to improved productivity in the host country, ultimately boosting foreign direct investment (FDI) inflows.
Research indicates that a minimum level of human capital is essential for countries to reap the benefits of Foreign Direct Investment (FDI), as argued by 1998 and supported by Li and Liu (2005), who emphasize its importance for economic growth in developing nations Developed countries, with their higher human capital, are likely to gain more from FDI compared to their developing counterparts, which often struggle to meet this threshold Sharma and Gani (2004) identified a positive link between FDI and improvements in Human Development Index (HDI) However, a study by Iamsiraroj (2016) analyzing 124 countries from 1971 to 2010 found an inverse relationship between primary education and FDI inflows, suggesting that basic human capital may not be necessary for attracting foreign investment.
The Governance Factors (G) in this study are measured through Political Stability score from World Government Index (WGI)
Political stability reflects the consistency of political transitions and the lack of violence or terrorism within a nation It is anticipated that political stability positively influences Foreign Direct Investment (FDI) inflows by reducing uncertainty, enhancing asset protection, improving production efficiency, and ensuring safer conditions for human resources.
Foreign Direct Investment (FDI) is more likely to be attracted to countries with strong governance and political transparency, as highlighted by Lederman, Mengistae, and Xu (2010) Research by Vo Van Dut and Nguyen Thi Phuong Nga (2015) across 30 Asian nations reveals that developing countries must enhance institutional factors, bolster legal systems to combat corruption, and implement protective policies for foreign investors to effectively draw in investment A transparent legal framework that safeguards property rights and enforces contracts fosters investor confidence and supports sustainable development Political risk significantly hampers capital flows, as investors typically shy away from politically unstable markets (Lucas, 1990) Singh and Jun (1995) further assert that political instability and the conditions for business operations are critical for FDI, especially in nations with historically low foreign investment Additionally, Chan and Gemayel (2004) indicate that investment risk related to political instability is particularly influential in regions like the Middle East and North Africa, where political risk is a more decisive factor compared to other developing areas.
Research indicates that while governance factors positively influence foreign direct investment (FDI), their impact, particularly in developing countries, may not be significant due to the dominance of economic factors like market size, labor costs, and natural resources Good governance can enhance the investment climate, but ultimately, fundamental economic considerations are the primary drivers of investment decisions.
Gross Domestic Product (GDP) is a key economic indicator that measures the total monetary value of all final goods and services produced within a country's borders over a specific period, typically annually or quarterly It encompasses both market-traded goods and services as well as certain non-market services provided by the government, like education and defense However, GDP excludes informal activities and unpaid work, such as housework and volunteer efforts, due to the challenges in accurately measuring and valuing them Furthermore, it does not consider the depreciation of fixed assets utilized in production.
Gross Domestic Product (GDP) can be calculated through three primary methods: the production method, which measures the total value added at each production stage; the expenditure method, which totals final expenditures from personal consumption, investment, government spending, and net exports; and the income method, which aggregates wages, profits, and other earnings related to production GDP serves as a crucial indicator of economic activity, with real GDP growth often used to evaluate economic health An increase in real GDP generally signifies rising employment and income, indicating a nation's economic prosperity.
Research indicates that Gross Domestic Product (GDP) plays a significant role in studies related to Foreign Direct Investment (FDI) Li & Kamau (2023) found that a higher GDP generally attracts increased FDI, particularly in consumer sectors Similarly, Bon et al (2021) corroborate these findings, highlighting the positive correlation between GDP and FDI attraction.
The relationship between GDP and Foreign Direct Investment (FDI) in Vietnam is notably positive, as highlighted by Hien et al (2024), which indicates that a higher GDP correlates with increased FDI from other nations in ASEAN countries This finding aligns with Alshamsi and Azam's (2015) research, which demonstrated that GDP per capita in the UAE significantly influences FDI inflows Numerous studies emphasize that GDP serves as an indicator of economic strength, thereby enhancing investor confidence.
Gross Domestic Product (GDP) is typically calculated by national statistical agencies in accordance with international standards, such as the 1993 System of National Accounts This process is supported by global organizations including the International Monetary Fund (IMF), the European Commission, the Organization for Economic Co-operation and Development (OECD), the United Nations, and the World Bank.
Imports refer to the acquisition of goods and services from foreign countries to satisfy domestic consumption or for re-export to generate profit This process entails purchasing products from international businesses and either utilizing them in the local market or selling them abroad for economic gain As a key component of international trade, imports facilitate the exchange of goods between nations, grounded in the principles of equivalence and monetary transactions.
LITERATURE REVIEW
Numerous studies on the impact of Foreign Direct Investment (FDI) and Environmental, Social, and Governance (ESG) factors have been conducted across various regions, including both OECD countries and developing areas like ASEAN and Africa These findings reveal significant insights into how ESG influences FDI flows, with the effects varying by geographical region.
Research indicates that OECD countries attract higher foreign direct investment (FDI) due to their strong governance and adherence to Environmental, Social, and Governance (ESG) standards Studies by Campbell et al (2012), Nardella et al (2019), and Antonetti highlight the positive correlation between quality governance and FDI inflows in these nations.
Investments in Corporate Social Responsibility (CSR) enhance corporate reputation and legitimacy in OECD countries that prioritize ESG standards, as demonstrated by Maklan (2016) Multinational enterprises (MNEs) with strong CSR performance attract foreign direct investment (FDI) more effectively by developing valuable intangible assets, particularly social and economic credibility These companies are perceived as "responsible investors," which helps to lower legal and social barriers when entering new markets, as supported by research from Bondy and Starkey (2014) and Attig et al.
Research by Symeou et al (2018) and others highlights that combining internationalization strategies with Corporate Social Responsibility (CSR) enables companies in OECD countries to optimize profits while reducing negative environmental and social impacts Firms with robust CSR initiatives foster trust with foreign partners and governments, which eases the internationalization process A key finding across these studies is the positive correlation between CSR and external legitimacy; companies that invest in CSR not only boost their competitiveness but also experience fairer treatment and reduced discrimination from local consumers and partners This is crucial in the globalized market, where adherence to Environmental, Social, and Governance (ESG) standards is essential for maintaining legitimacy and a strong international reputation.
CSR is recognized as a vital intangible asset that enables companies to navigate costs and risks associated with international expansion, especially in OECD countries with stringent ESG standards, as highlighted by Cheng et al (2013) and Cheng et al (2014).
Research by Crifo, Diaye, and Oueghlissi (2017) indicates that nations with elevated ESG scores experience reduced borrowing costs, making them more attractive for foreign direct investment (FDI) Investors view these countries as stable and reliable, particularly amid a fluctuating global financial landscape.
Research in the ASEAN region indicates a consistent relationship between ESG factors and FDI, yet challenges persist in institutional governance and environmental management, as highlighted by Liu et al.
Research indicates that Foreign Direct Investment (FDI) can drive growth in ASEAN countries but also presents social and environmental risks, particularly when Environmental, Social, and Governance (ESG) factors are inadequately managed Studies, including those by Gohou & Soumaré (2012) and Bakhsh et al (2017), highlight the negative environmental impacts of FDI in regions like ASEAN and Pakistan, where ineffective government policies lead to environmental degradation and increased CO2 emissions Furthermore, Musolesi et al (2010) and Baloch et al (2019) emphasize that without robust governmental intervention and institutional protections, FDI can exacerbate environmental imbalances Conversely, research by Muhammad and Khan (2019) suggests that while FDI can enhance economic growth in Asia, achieving social and environmental benefits necessitates a synergy of ESG policies and effective governance, a scenario often more successful in OECD countries due to their strong institutional frameworks.
A study by Wang, Yu, and Zhong (2020) reveals that enhancing ESG performance can drive economic growth in Asian nations For instance, China has effectively implemented strict environmental policies to attract foreign direct investment (FDI) in clean technology sectors, which helps reduce negative environmental impacts, as noted by Pisani et al (2019).
In Africa, research indicates that foreign direct investment (FDI) yields mixed results compared to OECD countries and Asia While Gohou & Soumaré (2012) highlight that FDI can provide economic advantages, these often fail to foster sustainable social progress due to inadequate environmental, social, and governance (ESG) frameworks Despite substantial FDI influx into some of the continent's poorest nations, improvements in human development indices are frequently lacking Studies by Suliman & Mollick (2009), Tiwari & Mutascu (2011), and Davis (2017) further note that while FDI has the potential to alleviate poverty, it also poses risks such as tax evasion and labor exploitation Additionally, research from Kwok & Tadesse (2006), Giuliani & Macchi (2014), and Cobham et al (2017) emphasizes that without robust ESG governance, the social benefits of FDI may be undermined, leading to adverse outcomes in African nations.
Table 2 1 Summary of most related research
Independent Variables Data sources Methodology Result
FDI inflows City-level environmental sustainability policies
Dataset on green policies from international cities and FDI performance metrics
Cities with robust environmental sustainability policies attract higher FDI inflows, highlighting the economic benefits of sustainability
Human capital, war presence, and development levels
Sub-Saharan Africa (regional panel data)
Fixed effects and dynamic panel data regressions
Human capital positively influences FDI inflows, while war conditions significantly deter investment in Sub- Saharan Africa
Human capital, war presence, and development levels
Sub-Saharan Africa (regional panel data)
Fixed effects and dynamic panel data regressions
Human capital positively influences FDI inflows, while war conditions significantly deter investment in Sub- Saharan Africa
Foreign Direct Investment (FDI) inflows into developing Asia-Pacific countries
ESG (Environment al, Social, and Governance) factors, including CO2 emissions, government effectiveness, corruption control, political stability, institutional quality, and the Human
Panel data of FDI and ESG- related metrics for 10 developing countries in the Asia-Pacific region, covering the period 2002–2022
Regression analysis performed on panel data using STATA software
Focuses on determining the impact of individual ESG factors on FDI
CO2 emissions positively correlate with FDI inflows, indicating regions with higher emissions tend to attract more FDI
The HDI negatively correlates with FDI, suggesting higher human development reduces FDI Governance and political factors
Development Index (HDI) show no significant impact
Generally FDI inflows or regional economic factors (e.g., exchange rates, CO2 emissions, institutional governance metrics, inflation rates)
Specific studies analyze metrics like economic transformati on
Included variables such as institutional quality, exchange rates, trade openness, or financial policy shocks in referenced datasets but were not cohesively explained for all findings
Documented across sources like macroeconomic repositories, econometric panels, and datasets referenced from agencies like the World Bank, UNCTAD, and local development councils
Cited quantitative techniques including econometric time-series evaluations, and specific mentions of studies using Panel
However, these are largely derived works referenced
Insufficient structured findings within the source Most referenced studies generalize FDI-institutional correlation tendencies rather than the conference emphasis
Financial development indicators, economic liberalization,
Systematic review of global literature and secondary data analysis
Financial development and FDI are interconnected Strengthened and governance quality
, and meta- analysis financial infrastructure boosts FDI inflows, and FDI supports the development of financial markets
COVID-19 impact factors, policy responses, and macroeconom ic indicators
Empirical data from Vietnam during the COVID-19 pandemic
Econometric models using time-series data and regression analysis
COVID-19 negatively impacted FDI inflows due to disruptions in global supply chains and economic uncertainty Adaptive policies helped mitigate some adverse effects
Foreign Direct Investment (FDI) in China
COVID-19 pandemic factors such as lockdown measures, economic disruptions,
Macroeconomic data from China during 2020–
Econometric modeling and time-series analysis
The pandemic caused short-term declines in FDI inflows due to mobility restrictions and market instability and recovery policies
Long-term projections indicate partial recovery linked to governmental policy effectiveness
Presence of ESG regulations, Market size, GDP growth, infrastructure availability, labor cost, political stability, government effectiveness, regulatory quality, control of corruption
High-income countries and Emerging Markets and Developing Economies (EMDE)
Panel data analysis and fixed effects
ESG regulations positively correlate with FDI attraction in high- income countries, but their impact varies in EMDEs based on other factors like government effectiveness and regulatory quality
In Chapter 2, the author outlines key foundational theories of Foreign Direct Investment (FDI) and reviews previous studies pertinent to the research topic This comprehensive analysis not only informs the next steps in the research process but also establishes crucial premises for developing the research model in the subsequent chapter.
RESEARCH MODEL & METHODOLOGY
RESEARCH PROCESS
After establishing the research objectives and reviewing previous studies on factors influencing Foreign Direct Investment (FDI) globally, the author developed a research model Utilizing data from 36 OECD countries between 2012 and 2022, the author employed an appropriate research method to analyze the model using Python 3.6.8 and machine learning libraries The detailed research process is described in the following sections.
Step 1: Provide an overview of the theoretical foundations and review previous studies related to the research topic across different countries and economies Subsequently, identify research gaps and outline the main research direction for the topic
Step 2: Based on the theoretical foundation and empirical evidence provided, the author proposes a research model, explains the variables, and formulates hypotheses for the study
Step 3: Determine the research sample and the appropriate research method that aligns with the research objectives and subjects From there, data is compiled and processed according to the proposed research model
Step 4: Conduct descriptive statistical analysis of the variables in the model, filter out outlier data, and analyze the correlation matrix of the regression model
Step 5: Find the appropriate algorithm for the model and data on the Python programming platform:
+ Determine the best test size for model development using Python
+ Evaluate the performance and reliability of regression models, regression coefficients, and visualize the results using Python
+ Select one model from four options: KNeighborsRegressor, DecisionTreeRegressor, RandomForestRegressor, LinearRegression, for optimal performance in various aspects
Step 6: Apply machine learning algorithms to improve model performance, addressing existing shortcomings in the model
Step 7: Finally, the author will base conclusions on the results from the model and compare the research findings with the hypotheses This will lead to a discussion of the results, drawing appropriate conclusions based on theoretical and practical foundations, and offering managerial implications related to ESG factors in OECD countries.
RESEARCH MODEL
Based on the author's research, the following research model is proposed:
Specifically, the proposed research model includes 7 variables as follows:
FDI it = β 0 + β 1 *CO2 it + β 2 *HDI it + β 3 *PS it + β 4 *GDP it +β 5 *EP it + β 6 *IP it
• FDIit: Foreign Direct Investment inflows (i) in year (t)
• CO2it: CO2 intensity of GDP per capita (i) at year (t)
• HDI it: Human Development Index (i) at year (t)
• PS it: Political Stability score (i) at year (t)
• GDP it: Gross Domestic Product (i) at year(t)
• EP it: Total Exports Volume (i) at year (t)
• IP it: Total Ixports Volume (i) at year (t)
• CPI it: Consumer Price Index (i) at year (t)
• β₀, β₁, β₂, β₃, β₄, β5, β6 are the regression coefficients, showing the respective contribution of each independent variable to the dependent variable
The CO2 intensity per capita, measured in tons, serves as a key indicator of environmental quality (E) and influences Foreign Direct Investment (FDI) attractiveness The author posits that countries with lower carbon emissions are viewed as more appealing for FDI, aligning with the growing ESG investment trend that suggests a correlation between reduced CO2 levels and increased FDI inflows Citing Opoku et al (2022), the article highlights a study that examined nine environmental degradation variables, including CO2 emissions and other greenhouse gas emissions, to evaluate environmental sustainability The findings indicate that while CO2 emissions negatively impact FDI, other environmental factors tend to encourage it Consequently, CO2 emissions are identified as the most relevant variable for the hypotheses explored in subsequent sections.
The Human Development Index (HDI) is a composite measure that evaluates average life expectancy, educational conditions, and living standards in a country, reflecting the Social (S) factor A higher HDI score suggests reduced reputation risk for foreign investors, particularly those focused on brand value By incorporating proxies for health, education, and goods access, HDI serves as a critical indicator of social development, a complex metric to assess As noted by the United Nations Development Program (2020), HDI has become an official statistic for countries tracking progress toward Sustainable Development Goals (SDGs) The index encompasses factors such as adult and child schooling, life expectancy at birth, and gross national income per capita, with expectations that HDI positively influences foreign direct investment (FDI) flows.
The Political Stability score (PS) evaluates the frequency of political exchanges and the absence of violence or terrorism at the national level, with the author positing that political stability positively influences Foreign Direct Investment (FDI) flows By reducing uncertainty, enhancing asset protection, improving production efficiency, and ensuring safer labor resources, political stability is deemed crucial for economic growth (Opoku et al., 2022) The author's focus on Political Stability is supported by Lucas (1990), who argues that political risk is a significant factor limiting capital flows, dismissing human capital and monopoly rents as less impactful Furthermore, Kim (2010) reinforces this view by demonstrating that the level of political stability in host countries significantly affects FDI flows, utilizing detailed measures of government stability that had not been previously explored.
Gross Domestic Product (GDP) is assessed through the logarithm of GDP, utilizing data from the World Bank database A larger economy indicates increased production capacity and greater investment opportunities, leading to the expectation that economic size positively influences Foreign Direct Investment (FDI) flows.
Total Exports (EP) and Total Imports (IP) Volume are crucial indicators of international trade, reflecting the exchange of goods between countries facilitated by currency These metrics are integral to the broader trade relationships within an economy, encompassing both domestic and international entities Import values are calculated under CIF (Cost, Insurance, and Freight) terms, representing the actual price paid at the first port of entry in US dollars, while export values are determined under FOB (Free On Board) terms, indicating the price of goods up to the export port, excluding international transport and insurance costs EP and IP are essential in research on trade openness, as highlighted by various studies, including those by Liu et al (2021) and Xiaochan Li and Michelle Kamau (2023) This study utilizes import and export indices sourced from the DataBank database.
Consumer Price Index (CPI) is based on a review of previous studies, and the CPI variable has been incorporated into the research model of Nguyễn Thị Kim Tiền
The Consumer Price Index (CPI) is a key indicator that tracks the average price changes of a selected basket of consumer goods over time Research has established a connection between Foreign Direct Investment (FDI) and CPI, highlighting their relationship in multiple studies (Diaye et al., 2021; Jingjing Chen, 2023; Mohamed Younis Mohamed Shagar, 2013).
In this study, the author adapted the models of Diaye et al (2021), Chipalkatti et al (2021), Chen (2023), and Xiaochan Li et al (2023) to align with the available research data from OECD countries, formulating several hypotheses based on these adjustments.
Hypothesis H 1 : Carbon Emissions (CO2) negatively impact Foreign Direct
Carbon emissions (CO2) play a crucial role in understanding the link between economic development and environmental impact The "Pollution Haven Hypothesis" (PHH) posits that multinational corporations often relocate production to countries with weaker environmental regulations to cut costs Research by Spatareanu (2007) and Dam & Scholtens (2008) supports this notion, indicating that nations with high carbon emissions attract foreign direct investment (FDI) in polluting sectors, especially in developing countries where environmental policies are less stringent However, contrasting studies by Poelhekke & Van Der Ploeg suggest alternative perspectives on this dynamic.
Research indicates that companies prioritizing sustainability are more likely to invest in nations with stringent environmental regulations to enhance their reputation and access green markets A study by Li and Kamau (2023) reveals that carbon emissions adversely impact foreign direct investment (FDI) in developing countries, as investors increasingly consider sustainability However, regional variations exist, as other studies suggest that countries with high carbon emissions but low production costs can still attract traditional industries and multinational corporations looking to optimize expenses Thus, Hypothesis H1 posits that CO2 emissions may negatively influence FDI in specific contexts.
Hypothesis H 2 : Human Development Index (HDI) positively impacts Foreign
The Human Development Index (HDI) is a key indicator of human development, encompassing health, education, and living standards Research by Borensztein et al (1998) emphasizes that a minimum level of human capital development is crucial for effectively attracting Foreign Direct Investment (FDI), as high-quality human resources enhance labor productivity and efficiency However, Chipalkatti et al (2021) found that in high HDI countries, rising labor costs and regulatory requirements can deter cost-sensitive industries Conversely, Chen (2023) highlights a positive correlation between HDI and economic growth in Central and Eastern European (CEE) countries, suggesting that a higher HDI may indirectly boost FDI attraction.
H2 expects that HDI will have a positive impact on FDI, especially in countries where human development has reached higher levels
Hypothesis H 3 : Political Stability (PS) positively impacts Foreign Direct
Political stability (PS) significantly impacts foreign investor confidence, as stable political environments attract more foreign direct investment (FDI) by minimizing investment risks (Mengistu & Adhikary, 2011) Additionally, PS plays a vital role in lowering transaction costs and improving transparency (Chipalkatti et al., 2021) Therefore, it is hypothesized that PS positively influences FDI, especially in sectors that demand long-term investments and entail higher risks.
Hypothesis H 4 : Gross Domestic Product (GDP) positively impacts Foreign
Gross Domestic Product (GDP) serves as a crucial economic indicator, showcasing a country's market size and consumption potential Research by Li & Kamau (2023) indicates that a higher GDP often draws increased foreign direct investment (FDI), particularly within consumer sectors.
Research indicates a positive relationship between GDP and foreign direct investment (FDI) in Vietnam (2021) Hien et al (2024) further support this by demonstrating that higher GDP correlates with increased FDI in ASEAN countries Similarly, Alshamsi and Azam (2015) found a significant positive impact of GDP per capita on FDI inflows in the UAE These findings suggest that GDP reflects economic strength, which enhances investor confidence Therefore, Hypothesis H4 posits that GDP positively influences FDI.
Hypothesis H 5 : Import (IP) positively impacts Foreign Direct Investment (FDI)
Imports (IP) indicate a nation's reliance on foreign goods and a robust consumer demand, both of which are crucial for attracting foreign investors to the domestic market Research, such as that by Yang et al (2000), suggests that elevated import levels can encourage foreign direct investment (FDI) in manufacturing and distribution sectors.
Research indicates that trade openness positively influences foreign direct investment (FDI) in Vietnam, as evidenced by findings from Zaman et al (2018), which highlight a significant correlation between increased trade openness and FDI inflows in Asian countries Additionally, Konstantin et al (2017) suggest that higher levels of FDI in a country attract more foreign investment Consequently, Hypothesis H5 posits that intellectual property (IP) will have a positive impact on FDI.
Hypothesis H 6 : Export (EP) positively impacts Foreign Direct Investment (FDI)
High exports (EP) reflect production capacity and the ability to access international markets, both of which are attractive to foreign investors Khan et al
RESULTS AND DISCUSSION
RESEARCH RESULTS
The information regarding the observational data of 36 OECD countries from
2012 to 2022 is presented in Table 4.1 and Table 4.2
Table 4 1 Information on observation data
Quốc gia Năm FDI EP CPI CO2 PS HDI LnGDP IP
Austria 2012 132.26 220.97 105.85 0.06 0.97 0.931 26.74 209.53 Austria 2013 105.8 229.9 107.97 0.06 0.95 0.929 28.07 217.78 Austria 2014 25.88 236.28 109.71 0.07 0.98 0.931 26.93 221.81 Austria 2015 58.36 202.78 110.69 0.07 0.87 0.933 28.23 188.46 Austria 2016 20.24 207.44 111.68 0.07 0.89 0.936 26.31 192.28 Slovak
0 Quốc gia 396 non-null object
The Python analysis revealed that the initial 396 rows of input data were complete and free of null values Subsequently, the author conducted an examination of the outliers present in the dataset, leading to significant findings.
All research variables exhibited outliers that necessitated treatment for data balance The Three-Sigma limits method was employed to address these outliers, and the outcomes post-treatment are detailed in Table 4.4.
Figure 4 2 Data after outliers processing
Table 4 3 Descriptive statistics of variables in the research sample
A total of 396 observations were collected from the DataBank and Human Development Reports, spanning the period from 2012 to 2022 After processing through Excel, the results are as follows:
Figure 4 3 AVG FDI OF OECD COUNTRIES FROM 2012 TO 2022 (bil USD)
From 2012 to 2022, Foreign Direct Investment (FDI) in OECD countries exhibited a steady increase, averaging 232.36 billion USD with a significant standard deviation of 480.17% Notably, the United States led the OECD nations with an FDI peak of 3435.35 billion USD in 2018, whereas Slovakia experienced the lowest FDI, recording -2919.05 billion USD in 2016.
AVG FDI OF OECD COUNTRIES FROM 2012 TO
FDI EP CPI CO2 PS HDI LnGDP IP count 396 396 396 396 396 396 396 396 mean 232.36379 399.21215 113.75864 7.46596 0.64586 0.90059 26.7995 399.01922 std 480.1686 496.5078 10.946559 3.65853 0.59572 0.04646 1.539238 560.59428 min -2919.05 7.2 97.75 1.53 -1.4 0.739 23.41 7.25
From 2012 to 2022, OECD countries had an average export value of 399.21 billion USD, with a significant standard deviation of 399.21% The United States led in export value, reaching an impressive 2995.05 billion USD in 2022, while Slovenia reported the lowest export value at just 7.2 billion USD in 2013.
From 2012 to 2022, the average import value (IP) for OECD countries was 399.02 billion USD, with a significant standard deviation of 560.59% In this period, the United States led with the highest import value, peaking at 3966.17 billion USD in 2022, while Iceland reported the lowest import value at just 7.25 billion USD in 2012.
For the Consumer Price Index (CPI), the average was 113.76 with a standard deviation of 10.95% The highest CPI was in Mexico in 2022, at 166.89, while the lowest was in Switzerland in 2016, at 97.75
Regarding Carbon Emissions (CO2), the average was 0.075 with a standard deviation of 0.036% The highest CO2 emissions were in Finland in 2022, at 0.214, while the lowest were in Slovenia in 2022, at 0.1534
The average score for Political Stability (PS) was 0.645, with a standard deviation of 0.595% Ireland achieved the highest Political Stability score of 1.62 in 2017, whereas Slovenia recorded the lowest score of -1.4 in 2022.
In 2022, the average Human Development Index (HDI) score was 0.9, with a standard deviation of 0.046% Chile achieved the highest HDI score at 0.967, while Colombia recorded the lowest score of 0.739 in 2012.
In 2021, Slovakia achieved the highest lnGDP at 30.88 trillion USD, while Australia recorded the lowest lnGDP of 23.41 trillion USD in 2016 The average lnGDP across the analyzed period was 26.79 trillion USD, with a standard deviation of 1.54%.
To check whether multicollinearity exists in the model, the author conducted a correlation analysis between the variables to examine the potential presence of multicollinearity
Table 4 4 Correlation between variables through Pearson's coefficient
FDI EP CPI CO2 PS HDI LnGDP IP
Figure 4 4 Visualization chart Correlation between variables
The correlation matrix analysis indicates that six independent variables positively influence Foreign Direct Investment (FDI), while two have a negative impact Specifically, Export Volume (EP), Import Volume (IP), Gross Domestic Product (GDP), Consumer Price Index (CPI), Political Stability (PS), and Human Development Index (HDI) contribute positively to FDI, with increases of 0.55, 0.56, 0.05, 0.018, 0.2, and 0.02, respectively Despite these positive influences, their overall impact on FDI remains marginal Conversely, Carbon Emission (CO2) negatively affects FDI, leading to a decrease of 0.15 as CO2 levels rise in OECD countries The correlation coefficients between the variables range from -0.14 to 0.56, and there is no evidence of multicollinearity, as all absolute values of the coefficients are below 0.8.
4.2.3 Identifying the optimal test size for model development
Determining the appropriate test size is essential for developing an effective machine learning model, as it ensures both accuracy and generalizability The test size, which is a distinct portion of the dataset, evaluates the model's performance post-training This choice significantly influences evaluation results and the model's forecasting ability in real-world applications The author has utilized Python software to process the data, yielding insightful results.
Figure 4 5 Test size to build model
Table 4.4 highlights the findings on determining the optimal test size for model development After performing 10 tests, the author found no significant differences among the test sizes Consequently, the study could utilize any of the three test sizes: 25%, 30%, or 55% Ultimately, the author opted for a test size of 55%.
After selecting the appropriate test size, the author performed regression analysis using four basic machine learning models: KneighborsRegressor,
DecisionTreeRegressor, RandomForestRegressor, and LinearRegression The aim was to identify the model that provided the best performance The results are presented in Table 6 below:
Table 4 5 Regression results with 4 model model_name score_train_mean score_test_mean abs_score_mean time_score_mean
Figure 4 6 Model performance visualization chart
The Linear Regression algorithm demonstrates the highest performance among the tested algorithms Consequently, the author will re-run the Linear Regression algorithm to evaluate its effectiveness further and explore additional boosting algorithms aimed at enhancing the model's performance and minimizing the disparity between training and testing outcomes.
Figure 4 7 Performance results of the LinearRegression algorithm (double test)
Selecting the right algorithm is essential for enhancing the performance and predictive accuracy of machine learning models Researchers frequently implement various enhancement techniques to optimize model efficiency, particularly for complex problems Among the most effective methods are boosting algorithms like AdaBoost, Gradient Boosting, and XGBoost, which significantly improve model outcomes.
Boosting is an ensemble learning technique that increases model accuracy by merging multiple weak learners into a more robust learner By utilizing an adaptive weighting mechanism, this algorithm effectively targets challenging data points, enhancing prediction accuracy and reducing errors Implementing boosting algorithms not only elevates the model's performance but also effectively mitigates overfitting in complex scenarios.
Below are the results after applying the boosting algorithms, including AdaBoost, Gradient Boosting, and XGBoost:
Figure 4 8 Results after applying AdaBoost, Gradient Boosting and XGBoost
The analysis of three Boosting algorithms reveals no performance enhancement when comparing the training set to the test set Consequently, the author opts to utilize the data results prior to the application of the Boosting algorithm.
Figure 4 10 SHAP Values of FDI