Unpacking the determinants of cross-border private investment in renewable energy in developing countries

Abstract

Private finance has emerged as a fundamental catalyst of the clean energy transition, an urgent and necessary step that must be taken in order to avert catastrophic climate change. Yet, private investment in renewable energy, although gaining momentum, remains limited in reaching some developing countries, where it is most needed. Previous research has provided some insights into the drivers and barriers faced by investors in this sector; however, these remain understudied in the context of developing country markets. This study contributes to this body of knowledge by systematically testing the effects that a variety of factors have on foreign investment in renewable power generation in developing countries, and by investigating how these effects may vary according to the source of finance. The determinants include the implementation of domestic renewable energy policies, the provision of international public finance and the wider business environment. Using panel data covering 62 countries over a 7-year period, this analysis relied on linear and logistic fixed effects models to determine what best explains the decision to invest and the volume of foreign private capital flows in the renewable energy sector. Results suggested that the provision of international public finance, regulatory support measures and feed-in tariffs, coupled with political stability, are strong drivers of cross-border investment in renewable energy in developing countries. Finally, evidence was presented that the effects of public interventions and business environment factors on investment may vary according to the source of finance, shedding light on the importance of breaking down investment flows to fully understand private financing decisions in renewable energy.