The Threshold Role of FDI Flows in the Energy-Growth Nexus: An Endogenous Growth Perspective

Abstract

In this paper, we have investigated the implications of the threshold effect of changes in FDI inflows for the nexus between energy consumption and economic growth in eight under-researched sub-Saharan African countries for the period 1971–2016. The countries are Benin, Congo, Kenya, Nigeria, Senegal, South Africa, Sudan, and Zambia. Using the lag-augmented VAR (LAVAR) model (corrected for cross-sectional dependence), we develop an empirical framework tightly linked to the endogenous growth model that allows for a threshold effect of changes (strength and weakness) in FDI inflows on the nexus. Our findings show that the FDI inflows matter for the causal link between energy consumption and economic growth in some countries, although, for the cross-section as a whole, our bootstrap simulation supports the neutrality hypothesis. The overall results suggest that an energy demand policy, such as an energy conservation policy, should not cause any significant adverse side-effects to economic growth in those sub-Saharan African countries. Policy implications of the threshold effect for the nexus for individual sub-Saharan African countries are also provided.