Democracy as a strategic asset: Sustaining foreign investment amid climate vulnerability in developing countries

: This study examines democracy as a moderator of the relationship between climate vulnerability and foreign direct investment (FDI) inflows in 132 developing countries from 1995 to 2023. Drawing on Dunning’s OLI paradigm and Risk Theory, it argues that climate vulnerability reduces FDI by weakening the locational attractiveness of host economies and increasing the risks associated with long-term operations. Democracy matters less as a direct investment advantage than as a political–institutional condition shaping how foreign investors respond to climate-related risk. Based on a panel dataset, the empirical analysis shows that climate vulnerability is consistently associated with lower FDI inflows, whereas democracy has no robust independent effect. The interaction results indicate that the negative association between climate vulnerability and FDI is weaker at higher levels of democracy, suggesting that democratic institutions help reassure investors and mitigate the adverse investment effects of climate-related vulnerability.