Energy intensity and foreign direct investment nexus: Advanced panel data analysis

Abstract

This paper analyzes the impact of foreign direct investment (FDI) on energy intensity. The survey was conducted on a large panel sample of 81 (43) countries for the period 1990–2014 (1991–2014) using advanced econometric methods that eliminate the methodological and conceptual weaknesses of the existing papers. The obtained results reveal energy-saving effect of foreign direct investment that is realized directly and indirectly. Every new net inflow of foreign direct investment reduces energy intensity. The strength of this negative impact depends on the level of countries’ technological development and the degree of their inventive activity. The higher the level of technological development, the more pronounced the energy-saving effect of foreign direct investment. When taking into account the average level of technological development for the entire sample, it can be concluded that each additional foreign direct investment net inflow of one billion dollars results in a decrease in energy intensity by 0.23%. The findings of this study confirm the hypothesis that more technologically developed countries have higher absorption capacity and can easily accept and exploit potential foreign direct investment technological spillover. Since the results of the analysis indisputably show that foreign direct investment reduces energy intensity, some useful guidelines for attracting quality foreign direct investment have been proposed.