Testing for Granger causality between energy use and foreign direct investment Inflows in developing countries

Foreign direct investment inflows (FDI) and emissions exhibit a two way relationship. In particular, this research studies the relationship between FDI inflows and emissions from energy use in developing countries. This is done through conducting a Granger causality test on the direction of the relationship between FDI inflows and energy use. For that, a fixed effect panel data model with heterogeneous slopes is used. Heterogeneous slopes specification is selected to account for individual differences within countries. Error correction model is the chosen estimation approach. The empirical results highlight the presence of a two way relationship between FDI inflows and emissions from energy use when testing for short and long run effects jointly. However, this result varies when testing for no long run effect within individual countries. Policy implications for developing countries are also given.