Promoting Energy Efficiency Through Foreign Direct Investments: Evidence from South Asian Countries

Abstract

This study investigates the impact of foreign direct investment on industrial energy intensity by incorporating economic growth, energy prices, industrial value-added, and carbon emissions in the South Asian countries for the period 1990–2018. We employ panel fully modified ordinary least square and dynamic ordinary least square. Our empirical results find that a stable foreign direct investment (FDI) and industrial energy intensity nexus exists and a 1% increase in FDI reduces total industrial energy intensity by 0.02%. Furthermore, this study applies the vector error correction model Granger causality test, results show that there is a bidirectional causal relationship between industrial energy intensity and FDI, and an unidirectional Granger causality running from industrial value-added and carbon emissions to industrial energy consumption in the long-run. In the short-run, the findings show the two-way causality between industrial energy intensity and foreign direct investment. Furthermore, a causal association from economic growth to FDI and carbon emissions. Based on empirical evidence, this study suggest that energy efficiency policies should be implemented for a sustainable development, environmental benefits, improving energy intensity will lead to long-term growth gains.