Foreign Direct Investment Inflows and Green Technology Innovation: The Role of Institutional Quality

Abstract

In the context of emerging economies facing the dual challenge of economic growth and environmental protection, foreign direct investment (FDI) is expected to be a crucial channel for green technology transfer. However, empirical evidence on the impact of FDI on green technology innovation (GTI) remains divided between the "Pollution Halo" and "Pollution Haven" hypotheses. Existing studies primarily view institutional quality (IQ) as a factor that enhances an already positive impact of FDI, rather than examining whether institutions are a prerequisite for that positive impact to emerge. This study, conducted in five ASEAN countries (ASEAN-5), aims to test the impact of FDI on GTI and, specifically, to analyze the moderating role of IQ. Using panel data for the period 2002–2021 with 88 observations, applying the System GMM estimation method combined with an FDI × IQ interaction term model, and identifying the institutional threshold through marginal effect analysis. The results show that FDI has no statistically significant direct impact on GTI (β1 = -0.015, p > 0.1), while the positive and highly significant interaction term coefficient (β3 = 0.150, p < 0.01) implies that IQ plays a decisive moderating role. Concurrently, the IQ threshold is identified at IQ = 0.1, indicating that FDI only promotes green innovation when IQ surpasses the global average. The study reconciles the two opposing hypotheses by demonstrating that IQ is the decisive variable determining which scenario prevails, while also implying that ASEAN countries must prioritize comprehensive institutional reforms to enhance their technological absorptive capacity and transform FDI into a true driver of green growth.