Foreign direct investment and the structural transition of energy consumption: impact and mechanisms

Abstract

The development of renewable energy is an important pathway to realize the structural transition of energy consumption. This study investigates the impact and mechanism of foreign direct investment (FDI) on transforming the host countries’ energy consumption structure to renewable energy. We conducted empirical tests using cross-country panel data of 65 economies from 2000 to 2020. The results revealed that FDI significantly negatively impacts the structural transition of energy consumption in host countries. The mechanism analysis established that the industry transfer and technology spillover effects of FDI are not conducive to transforming the host country’s energy consumption structure to renewable energy. Heterogeneity analysis revealed that FDI has a greater negative impact on the renewable energy consumption structure in low-income countries and non-OECD countries, as well as in countries with high levels of agricultural and manufacturing development and low levels of service sector development. Moreover, the Kyoto Protocol is not conducive to the increase in the proportion of renewable energy consumption in host countries. By contrast, the negative impact of FDI has been effectively mitigated after signing the Paris Agreement. Further analysis determined that improving governance capacity effectively inhibits the negative impact of FDI on the renewable energy consumption structure. The findings provide a theoretical basis for accurately identifying the effects of FDI on energy structure, while also providing policy insights for countries to formulate and improve their sustainable development efforts.