Unfolding FDI, Renewable Energy Consumption, and Income Inequality Nexus: Heterogeneous Panel Analysis

Abstract

We aim to examine the nexus between Foreign Direct Investment (FDI), Renewable Energy Consumption (REC), and income inequality across selected High-Income Countries (HIC), Upper Middle-Income Countries (UMIC), Lower Middle-Income Countries (LMIC), and Low-Income Countries (LIC). Given the cross-sectional dependency, slope homogeneity, and stationarity properties, we find that the aforementioned variables across all the regions are cointegrated in the long run (LR). For LR estimation, we use the Cross-Sectional-Autoregressive Distributed Lag (CS-ARDL) approach. For the HIC and the UMIC, an increase in FDI increases REC, which in turn causes income inequality to decrease. In the case of LMIC, an increase in REC causes an increase in FDI and decreases income inequality. However, we could not establish a significant relationship with the LIC. We also provide some useful recommendations, such as increased institutional efficiency and promotion of renewable energy investments through higher access to finance.