Does outward foreign direct investment drive low-carbon development in home countries? Evidence from China’s industrial sub-sectors

Outward foreign direct investment (OFDI) plays a vital role in accelerating the industrial green transformation of host countries. While existing studies have explored OFDI’s effects on investment performance, productivity, and innovation, its impact on the green total factor productivity (GTFP) of sending countries has been relatively unexplored. This paper developed a green Solow model to examine the influence mechanism of OFDI on industrial GTFP, then conducted empirical tests using panel data from 35 sub-sectors of China’s industrial sector from 2004 to 2021. The findings are as follows: (1) OFDI helps enhance industrial GTFP, contributing to advancing green technology progress but not green efficiency; (2) Mechanism analysis suggests that to capitalize on OFDI’s positive effects on green productivity growth, emphasis should be placed on promoting independent innovation capabilities rather than relying solely on imitative innovation; (3)Further analysis using the panel threshold model reveals that when the capability of independent innovation crosses the threshold value, the positive effect of OFDI weakens to some extent; (4) The implementation of a carbon emissions trading scheme reinforces the positive impact of OFDI on GTFP and acts as a screening mechanism for OFDI; (5) The impact of OFDI on GTFP differs by development stages and industrial sub-sectors’ characteristics. This paper offers valuable insights for governments to facilitate industrial sectors’ sustainable development by maximizing the benefits of increased openness. JEL Classifcation: F18; F21; Q55; Q56