The FDI Effect of Sovereign ESG in Belt and Road Countries: Institutional Quality, Dimensional Heterogeneity, and Regional Differences

Abstract

Against the dual backdrop of the deepening Belt and Road Initiative (BRI) and the advancing global sustainable development agenda, sovereign ESG performance has become a key factor influencing international capital flows. Using panel data from 76 Belt and Road partner countries over 2001–2024, this study examines the impact, mechanisms, and boundary conditions of sovereign environmental, social, and governance (ESG) performance on foreign direct investment (FDI). The findings reveal that sovereign ESG exerts a significant promoting effect on FDI inflows, exhibiting dimensional heterogeneity in the order of social > governance > environmental performance. Mechanism analysis shows that trade openness, social inclusion, and human capital are three important transmission channels. Further analysis reveals a single threshold based on institutional quality: sovereign ESG primarily functions as an institutional compensatory advantage, exerting a significant effect in countries with weak institutions, while its marginal utility diminishes in countries with mature institutions. This effect is prominent in countries with a colonial history and in East and Southeast Asia, but exhibits an inhibitory effect in South Asia and Central and Eastern Europe due to institutional and regulatory frictions. These findings empirically define the effectiveness boundary of sovereign ESG in attracting FDI, providing empirical evidence for Belt and Road countries to formulate differentiated ESG strategies for investment attraction and expanding the understanding of the economic consequences of sovereign ESG from an institutional compensation perspective.