FDI and coal lock-in: The Global South’s development dilemma

Why do poorer countries continue to adopt coal-fired power despite global climate pressures, while richer countries phase it out? This paper argues that the divergence in coal power phase-out trajectories between the Global North and South is driven by the coupling of greenfield investment with coal-fired power expansion in the Global South. Using matched global greenfield investments at the project level with coal plants at the city-level and employing the stacked DID strategy, we find that new coal-fired power installations increase cities’ inbound greenfield investment by 7.9% annually over eight years, particularly in low- and lower-middle-income countries; however, the inward capital is less oriented toward renewable technologies. This linkage arises from structural asymmetries: capital flows from the Global North to the South, the relocation of energy-intensive industries, and fragmented environmental regulation. Our findings highlight that the dilemma faced by developing countries: phasing out coal-fired power entails extremely high opportunity costs, while expanding coal power capacity crowds out investments in renewable technologies. Overall, we provide new evidence on how uneven development constraints result in fossil fuel dependency in the Global South.