Green Finance and the Environmental Efficiency of FDI in OECD Economies

In this study, I examine the relationship between foreign direct investment (FDI) and environmental efficiency in OECD countries, emphasizing the moderating role of green finance over the period 2010–2022. Using advanced econometric approaches, including Tobit, PCSE, FGLS, and two-step GMM estimations, the results consistently indicate that FDI exerts a significant negative effect on environmental efficiency. In contrast, green finance contributes positively to environmental performance, although the level of significance varies across models. Importantly, the interaction between FDI and green finance is positive and statistically significant, highlighting the crucial role of green finance in offsetting the environmental drawbacks associated with FDI inflows. The analysis further reveals that factors such as urbanization, industrialization, trade openness, and natural resource management influence environmental efficiency to varying degrees. The findings underscore the need for policymakers to strengthen green finance initiatives and environmental governance so that FDI attraction supports, rather than undermines, sustainable development objectives in OECD economies.