The role of foreign direct investment and environmental taxation in promoting renewable energy sustainability

Abstract

This study examines the relationship between Foreign Direct Investment (FDI) and the achievement of Sustainable Development Goal 7 (SDG 7), which aims to ensure affordable, reliable, sustainable, and modern energy for all. Using a panel dataset of 891 country-year observations, the study analyzes how FDI influences SDG 7, while controlling for variables such as GDP, inflation, population growth, patents, and research and development expenditures. The research specifically investigates the moderating role of environmental taxation in this relationship. The findings show a statistically significant negative correlation between FDI and SDG 7, suggesting that foreign investment may hinder the achievement of sustainable energy objectives in some contexts. Specifically, countries with lax environmental regulations tend to attract FDI that undermines sustainable energy efforts, supporting the Pollution Haven Hypothesis. In contrast, higher environmental taxes are shown to mitigate the negative impact of FDI on SDG 7, indicating that stronger regulatory frameworks can help align foreign investments with sustainable energy goals. Further, the study reveals that the impact of FDI on SDG 7 varies by income levels: in high-income countries, FDI has a more detrimental effect on sustainable energy development, whereas in low-income countries, FDI appears to stimulate technological transfer and innovation in clean energy solutions. This research contributes to the literature by providing a nuanced understanding of how environmental taxation can moderate the negative effects of FDI on SDG 7. The findings underscore the importance of policy design in directing FDI flows toward sustainable energy outcomes. Policymakers are encouraged to implement stricter environmental tax policies, particularly in high-income countries, to ensure that FDI supports sustainable energy practices and contributes to achieving SDG 7.