Does FDI influence renewable energy consumption? An analysis of sectoral FDI impact on renewable and non-renewable industrial energy consumption

- FDI generally discourages the use of unclean energy.
- Economic growth promotes non-renewable energy consumption.
- Service FDI save energy and encourage the switch to renewable energy.
- Mining FDI to low and lower middle-income panels save energy.
- These results are mainly consistent with the FDI halo effect.

This study examines the link between foreign direct investment (FDI) and energy demand. FDI is a source of financing that allows businesses to grow. At the same time, FDI can be a source of innovation that promotes energy efficiency. Existing evidence on the impact of aggregate FDI inflows on energy consumption is scarce and inconclusive. In the current study, we disaggregate FDI inflows into mining, manufacturing, total services, and financial services components and examine the impact of these FDI flows on renewable - and non-renewable industrial energy - sources for 74 countries for the period 1985-2012. We employ a Blundell-Bond dynamic panel estimator to control for endogeneity and omitted variable biases in our panels. The results point broadly to an energy consumption-reducing effect with respect to non-renewable sources of energy and an energy consumption-augmenting effects with respect to renewable energy. We find that these effects vary in magnitude and significance by sectoral FDI.