ESG, Foreign Direct Investment, and Outcome-Specific Development: Evidence from a Global Panel

Abstract

This paper investigates how country-level environmental, social, and governance (ESG) conditions and foreign direct investment (FDI) are associated with different development-related outcomes. Using an unbalanced panel of 50 countries over 2003–2023, the study constructs ESG pillar indices and estimates static and dynamic fixed-effects models, with GMM and additional specifications used as robustness checks. Rather than treating sustainable development as a single composite outcome, the analysis distinguishes income growth, environmental damage, public investment in human capital, and outward investment capacity. The results show a conditional and outcome-specific pattern. Environmental performance is consistently associated with lower CO₂ damage, while stand-alone ESG pillars do not directly explain short-run GDP or GDP per capita growth. FDI inflows are positively associated with income-related outcomes, and the FDI × ESG interaction is strongest for GDP growth, GDP per capita growth, and FDI net outflows. However, this complementarity is not uniformly sustainable: In the CO₂ damage model, FDI-related terms are associated with higher environmental damage, while education expenditure is more closely linked to domestic social and governance conditions than to FDI-related channels. These findings suggest that ESG and FDI should not be theorized as uniformly reinforcing drivers of sustainable development. Instead, their association depends on the development outcome considered and may involve trade-offs between income-related gains, outward investment capacity, and environmental costs.