Green foreign direct investments and the deepening of capabilities for sustainable innovation in multinationals: Insights from renewable energy

Abstract

There is mounting agreement that the global economy is at the nascent stage of a green transformation. In response, multinational enterprises (MNEs) are seeking to enhance their capabilities for sustainable innovation and many have started to globalise their green efforts. But to what extent and how (if at all) do green Foreign Direct Investments (FDIs) contribute to the deepening of sustainability capabilities? To address this question, we employ a novel dataset of 1217 green FDI in renewable energy sectors worldwide, during the period 1997 to 2015. A propensity score matching and difference-in-difference econometric strategy provides three main results. First, green FDIs enhance the overall orientation to sustainability of MNEs. They have both a greening effect on the firms’ overall technology bases and increases specialization in specific green technologies. Second, green FDIs have a significant positive impact on the degree and quality of MNEs innovative capacity in sustainable technologies. In other words, the MNEs extend their innovative capabilities towards more sustainability-oriented direction and strengthen their innovation activities related to green technologies. Third, we find that the globalisation process mode matters: in the long run, green FDIs result in newly-established subsidiaries contributing more to innovativeness and greening than acquisition of foreign firms. These findings have important implications for policies designed to increase the sustainability transition.