Unlocking the potential of foreign direct investment to reduce energy intensity.

Abstract

This study examines the potential of foreign direct investment (FDI) to reduce energy intensity in developing countries between 1996 and 2019.Using a generalized method of moments (GMM) estimator, we investigated the linear and non-linear impact of FDI on energy intensity through the interaction effect of FDI and technological progress (TP). The results reveal that FDI has a positive and significant direct effect on energy intensity, whereas the energy-saving effect is evident through energy-efficient technology transfers. The strength of this effect depends on the level of technological progress in developing countries. The outcomes of the Hausman-Taylor and dynamic panel data estimations corroborated these research findings, and disaggregated data analysis by income groups also provided similar results, signifying the validity of the results. Based on the research findings, policy recommendations are formulated to improve the ability of FDI to reduce energy intensity in developing countries.