Sustainable Foreign Direct Investment in Emerging Markets: The Institutional Drivers of Firms' Climate Action

This study examines how home‐ and host‐country institutions jointly shape the impact of foreign direct investment (FDI) on firms' climate action commitments (CAC) in emerging markets. Drawing on New Institutional Economics and Varieties of Capitalism, we conceptualize FDI as a mechanism of institutional transmission through which multinational enterprises transfer governance logics and sustainability orientations from home to host countries. Using panel data on 1161 firms operating in 20 emerging economies and participating in the United Nations Global Compact between 2014 and 2020, we estimate panel models that account for unobserved heterogeneity and endogeneity. The results show that FDI from coordinated market economies strengthens firms' climate action commitments, whereas FDI from liberal market economies weakens them. Host‐country institutions also play a central role: higher levels of economic freedom are associated with lower climate engagement, while stricter environmental regulation increases the likelihood of CAC adoption. These effects are contingent on the institutional origin of FDI. Investment from coordinated economies mitigates the adverse effects of liberalized host environments, whereas investment from liberal economies becomes more sustainability‐oriented only under strong regulatory and normative pressures. Overall, the findings highlight the importance of institutional alignment between home‐ and host‐country environments in shaping the sustainability outcomes of FDI and offer actionable insights for managers and policymakers seeking to align foreign investment with climate mitigation goals in emerging markets.