Climate change and foreign direct investment: The role of local governance quality

Abstract

This paper studies the impacts of climate change and local governance quality on Foreign Direct Investment (FDI) inflows in 63 provinces of Vietnam from 2006 to 2021. Data are collected from the General Statistics Office (GSO), the Vietnam Provincial Governance and Public Administration Performance Index (PAPI), and the Vietnam Disaster and Dyke Management Authority (DDMA). The results from Fixed Effects (FE) estimators and Feasible Generalized Least Squares (FGLS) show that climate change - measured by total economic losses and deaths from storms and floods - reduces FDI inflows. At the same time, local governance quality increases the attraction of this capital inflow. Remarkably, local governance quality can mitigate the negative impact of climate change on FDI inflows in 63 provinces of Vietnam. These findings contribute a new perspective to the literature on the role of local governance in sustaining FDI inflows within the context of environmental challenges in a developing country.