Foreign direct investments, energy efficiency, and innovation dynamics

Abstract

Rapid growth in energy consumption influences on the one hand energy prices and endangers energy supply security; on the other hand, it distresses ecological balances. In this respect, the efficient use of energy resources plays a key role for challenging these problems in the long run. Thus, without innovations and its diffusion to broad regions, global energy efficiency improvements cannot be realized. In this context, foreign direct investments (FDI) are important elements of technology transfer to developing countries and to emerging economies. However, they can also change the structure of the host economies as well. Having said that, these structural effects are frequently ignored in the relevant literature. The aim of this paper is to explain the relationship between FDIs and technology determined energy efficiency by considering the structural effects as well. For this purpose, the change of industrial energy intensity has been analyzed using decomposition methodology that adjusts structural effects from energy intensity changes. Finally, a panel data analysis with country specific effects has been conducted which reflects a significant correlation between FDI and technology determined energy efficiency improvements in the eastern EU members and cohesion countries. These results affirm the existing theoretical basis regarding positive effects of FDIs on technology level of host countries on the one hand. Another conclusion, on the other hand, is that economic integration indirectly contributes also to efficient use of resources.