When Does Foreign Direct Investment Promote Sustainable Economic Transformation?

This paper examines the relationship between foreign direct investment (FDI), economic development and sustainability performance by integrating evidence on growth, structural transformation, environmental outcomes, green innovation and sustainable development. The literature shows that FDI can support capital accumulation, exports, employment, productivity and technological upgrading, but these effects are neither automatic nor homogeneous across countries and sectors. Their magnitude depends on absorptive capacity, financial development, institutional quality, domestic productive linkages and the sectoral allocation of foreign capital. The environmental consequences of FDI are similarly conditional. Foreign investment may increase emissions through scale effects, energy-intensive production and pollution relocation, while it may also support cleaner production through technological diffusion, renewable-energy integration and environmental innovation. The coexistence of pollution-haven and pollution-halo mechanisms therefore reflects differences in regulation, development levels, technological capabilities and investment composition. The paper further emphasizes that FDI should be evaluated from a multidimensional sustainability perspective rather than exclusively through GDP growth or aggregate inflows. Recent evidence indicates that sustainable outcomes are more likely when foreign investment is coordinated with institutional strengthening, environmental regulation, industrial restructuring, renewable-energy development and domestic innovation capacity. The resulting framework presents FDI as a conditional mechanism whose contribution to sustainable development depends primarily on how international capital is integrated into national economic, technological and environmental structures.