Foreign Direct Investment and Environmental Expenditures of Local Budgets: A Comparative Analysis of EU Country Cases for Ukraine

Abstract

This paper examines the relationship between foreign direct investment (FDI) and the volume and structure of environmental expenditures of local budgets in the context of fiscal decentralization. The relevance of the study is driven by the growing importance of green investments in ensuring sustainable development and the increasing responsibility of local governments for the implementation of environmental policy. The aim of the paper is to identify the nature and direction of FDI’s impact on environmental expenditures at the local level and to develop policy recommendations for Ukraine based on a comparative analysis of selected EU country cases. The methodological framework is based on a comparative case study approach, which allows for the identification of causal mechanisms linking foreign capital inflows and public spending decisions within different institutional settings. The analysis focuses on three European Union countries – Poland, Sweden, and Romania – representing distinct development models: “transformation catching-up,” “environmental leadership,” and “institutional challenges.” Each case is examined using a unified analytical structure, including macroeconomic and institutional context, FDI dynamics, their impact on environmental expenditures, and subnational specificities. The findings indicate that the impact of FDI on environmental expenditures of local budgets is not uniform and largely depends on the institutional capacity of local governments. In Poland, FDI is embedded in regional development strategies and contributes to increased investment in environmental infrastructure. In Sweden, a model has emerged in which a stringent regulatory framework and advanced financial instruments ensure synergy between foreign investment and long-term environmental spending. In contrast, Romania demonstrates an “institutional trap,” where increased FDI inflows are associated with a fiscal gap between revenues and the actual needs for environmental financing. The study concludes that the key determinant of the effectiveness of FDI in supporting environmental policy is the ability of local authorities to strategically manage investment flows. Based on the results, policy recommendations for Ukraine are proposed, focusing on strengthening institutional capacity at the local level, integrating environmental requirements into investment policies, developing municipal financial instruments, and diversifying the investment base.