Multifaceted Assessment of the Relationship Between FDI and Sustainable Development in Latin America: The Role of the FDI Surplus Upon Environmental Productivities

Gonzalo H. Soto, Pedro L. Büttenbender and Xavier Martinez‐Cobas

Review of Development Economics, 2026, vol. 30, issue 2, 695-715

Abstract: In the present study, we examined the impact of the net effects of foreign direct investment (FDI) on biodiversity and ecological footprint productivity in 21 Latin American countries over a 32‐year period from 1990 to 2022. Additionally, we propose the hypothesis of ecological transition (ETH), which conceptualizes the asymmetric impact on the supply (biodiversity) and demand for natural resources (ecological footprint) within societies transitioning toward green economies. We have framed conclusions upon other novel theoretical frameworks, such as the filter‐out hypothesis, where outward FDI (OFDI) contributes to clean externality‐intensive productive capital, or the green transition paradox, where low biocapacity productivities do not denote, necessarily, environmental degradation, while high ecological footprint productivities do not denote improved environments. Also, a new variable was introduced, denoted as the surplus of FDI flows, which is introduced to denote the relevance of FDI to promote sustainable development by means of boosted productivity, taking into account inflows and outflows of FDI. To ensure robustness, we estimate these relationships using PCSE and FGLS and subsequently explore causality. Our findings indicate that the ETH based on income per capita level, demographic concentration, OFDI, and FDI surplus is particularly significant. Furthermore, certain factors complementarily influence the different supply and demand relationships regarding environmental sustainability in the context of economic growth processes. Consequently, we suggest a set of policies tailored to the region that promote the harmonization of environmental development and economic growth, given the significant role of FDI as a catalyst for sustainable growth.

Date: 2026
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