Sovereign sustainability, institutions, and FDI: evidence from an EESG framework

Abstract This research enhances the traditional ESG methodology by using a comprehensive sovereign-level EESG framework, which includes the economic, environmental, social, and governance elements influencing national sustainability performance. We evaluate the impact of EESG competencies on foreign direct investment (FDI) and its implications for multinational business models, employing an annual panel of 94 advanced and developing nations from 2000 to 2022. To mitigate endogeneity and path dependence, we utilize a two-step system GMM to estimate dynamic FDI equations and develop a clear EESG score. The findings indicate that superior EESG performance significantly enhances FDI inflows. In developing nations, the Environmental and Social pillars gain prominence, whereas in rich nations, the Governance and Economic pillars have greater influence. The results remain robust when employing reduced-instrument GMM, Driscoll-Kraay fixed-effects, and other EESG weightings. Model diagnostics (AR(2), Hansen) further validate the accuracy of the requirements. From the perspective of the "new business model," the evidence indicates that sovereign sustainability enhances risk pricing, strengthens policy-institutional synergies influencing multinational investment strategies, and increases the reliability of the supply chain. The article demonstrates that EESG constitutes a more comprehensive framework for sustainability, altering our perception of the benefits associated with a country's geographical position in a dynamic global investment landscape. JEL Classification Codes: Q56, F21, O19