Relative ESG positions among OECD countries in the presence of international competition for FDI inflow: A gravity model perspective

Eliciting from a gravity model framework, this study formulates a country's attractiveness to FDI inflow as a function of its ESG distance from competing countries. This formulation considers two opposing forces governing how ESG influences a country's FDI inflow: while the neo-classical cost-based view (NC) posits that ESG regulations raise private costs and lower firms’ productivity, the Porter Hypothesis (PH) posits that ESG regulations induce innovations and improve productivity. Theoretically, a country's attractiveness to FDI increases (decreases) with its competitive ESG position relative to those of competing countries if the PH (NC) force dominates. This theoretical implication is empirically tested using a sample of 38 OECD countries, plus China, and Singapore from 2013 to 2022. The results suggest that the PH force dominates and that the intensity of FDI competition between countries decreases with the geographic distance between them. Moreover, the evidence for PH is mainly driven by the environmental (E) and social (S) dimensions.