Can foreign direct investment harness energy consumption in China? A time series investigation

- The FDI-energy nexus is negative in the long run, but positive in the short run.
- The scale effect dominates the technique and composition effects in the short run.
- A 1% increase in FDI reduces energy consumption by 0.21% in the long run.
- FDI reduces non-renewable energy consumption in the long run.
- China must promote FDI in selected sectors and strengthen absorptive capacities.

This study assesses the long-run relationship and short-run dynamics between foreign direct investment (FDI) and energy consumption in China. Applying the bounds testing approach to annual data from 1982 to 2012, we find that a stable FDI-energy nexus exists in the long run and a 1% increase in FDI reduces energy consumption by 0.21%. However, this study shows a positive association between FDI and energy consumption in the short run, attributing to the dominance of the scale effect. Our results remain robust to different measurements and estimators. It is suggested that the Chinese government shall support the inward FDI in the tertiary and energy sectors and strengthen local absorptive capacities to fully internalize FDI-related knowledge spillovers in energy conservation.