Climate‐Proofing FDI : Green Productivity and Innovation as Drivers of Resilience in Vulnerable Sectors

ABSTRACT The main thrust of this study is to investigate how climate shocks influence foreign direct investment (FDI) inflows in climate‐sensitive sectors and the roles played by green productivity and technological innovation in generating spillover effects that mitigate climate risks. This study constructed country‐level green productivity based on a Malmquist–Luenberger index with undesirable outputs. This national measure is then used to examine how host economy green productivity conditions FDI resilience across sectors. Using panel data covering agriculture, mining, electricity, construction, and manufacturing across 38 countries (2005–2023). The study employed fixed‐effects panel models with Driscoll–Kraay corrections to address heteroskedasticity and cross‐sectional dependence. The results revealed that climate shocks reduce FDI inflows in climate‐sensitive sectors, but higher levels of green productivity and innovation in upstream and peer sectors moderate this effect. There is evidence of positive spillovers across agriculture, mining and quarrying, construction, manufacturing, electricity and gas sectors, highlighting the importance of technology diffusion and productivity linkages for resilience. The study contributes by identifying sectoral mechanisms through which sustainability and innovation foster FDI resilience under climate risk. Policy implications point to the need for climate‐smart industrial strategies that integrate productivity upgrading, innovation diffusion, and cross‐sector adaptation support.