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Is energy market integration a green light for FDI?

Maria T. Costa-Campi, Jordi Paniagua, and Elisa Trujillo

Year: 2018
Volume: Volume 39
Number: Special Issue 1
DOI: 10.5547/01956574.39.SI1.mcos
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This paper contributes to a better understanding of the effects of the European single market strategy by studying the effect of energy market integration (EMI) on foreign direct investment (FDI). Enforcing an EMI diminishes energy uncertainty and price volatility and signals stronger and credible institutions. FDI may, as a result, increase both within and outside the EMI area through two channels: first, via energy price converge and, second, via price dispersion reduction. We develop a formal model to explain how these mechanisms affect the capital invested abroad by heterogeneous firms. The Iberian Electricity Market (MIBEL) integration of 2007 is used to quantify the effect of EMI on FDI empirically. Gravity estimates on a global dataset including bilateral FDI data show that the integration of Portugal and Spain's electricity market increased both the amount of FDI's participants and the number of foreign projects. In line with our theoretical expectations, our estimates show that the increase of FDI is mainly due to the reduction in price dispersion. However, the institutional credibility signal sent by MIBEL had a greater influence than expected by the actual price reduction. Furthermore, we also observe a positive increase in FDI from neighboring countries (in this instance, France), albeit lower in magnitude.

Do Energy Prices Drive Outward FDI? Evidence from a Sample of Listed Firms

Gregoire Garsous, Tomasz Kozluk, Dennis Dlugosch

Year: 2020
Volume: Volume 41
Number: Number 3
DOI: 10.5547/01956574.41.3.ggar
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Affordable energy is often argued to be a vital condition for manufacturing industries to be able to compete on global markets. Consequently, the idea of introducing a (unilateral) carbon tax is usually opposed on the grounds of potential losses of competitiveness and leakage of economic activity abroad. In this paper, we shed light on one potential channel of such effects - the impact of energy prices on firms' outward FDI. Using an instrumental variable strategy we estimate the longer-term effects on a sample of listed firms from 9 manufacturing sectors in 24 OECD countries over 1995-2008. The results suggest that relative energy prices - that is the difference between domestic energy prices and prices in the potential FDI destination - are significantly and asymmetrically related to firms' outward FDI asset share. Only firms that faced increases in the relative energy prices have increased their international asset position and this effect was relatively small.

Distinguishing the Complex Effects of Foreign Direct Investment on Environmental Pollution: Evidence from China

Jianxun Chen, Hui Tan, and Yingran Ma

Year: 2022
Volume: Volume 43
Number: Number 4
DOI: 10.5547/01956574.43.4.jche
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We attempt to investigate how and when foreign direct investment (FDI) impacts different types of environmental pollution in host countries. Using provincial data from China between 1995 and 2015, we find that FDI mitigates air pollution, yet it has insignificant effect on water and solid pollution. We further reveal that it is the combination of the technology, scale and structure effects that jointly determines the impact of FDI on environmental pollution. Among them, the technology effect takes the most dominant role, followed by the scale effect and structure effect. In addition, by considering the time effect on environmental policy change, we suggest that the pollution halo effect mainly occurs after air pollution policy revision. Our findings provide insight on the complex mechanisms and theoretical boundary of FDI on different types of environmental pollutants.

The Threshold Role of FDI Flows in the Energy-Growth Nexus: An Endogenous Growth Perspective

Olayeni Olaolu Richard, Jemiluyi Olayemi Olufunmilayo, Aviral Kumar Tiwari, and Shawkat Hammoudeh

Year: 2023
Volume: Volume 44
Number: Number 5
DOI: 10.5547/01956574.44.4.oric
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In this paper, we have investigated the implications of the threshold effect of changes in FDI inflows for the nexus between energy consumption and economic growth in eight under-researched sub-Saharan African countries for the period 1971–2016. The countries are Benin, Congo, Kenya, Nigeria, Senegal, South Africa, Sudan, and Zambia. Using the lag-augmented VAR (LAVAR) model (corrected for cross-sectional dependence), we develop an empirical framework tightly linked to the endogenous growth model that allows for a threshold effect of changes (strength and weakness) in FDI inflows on the nexus. Our findings show that the FDI inflows matter for the causal link between energy consumption and economic growth in some countries, although, for the cross-section as a whole, our bootstrap simulation supports the neutrality hypothesis. The overall results suggest that an energy demand policy, such as an energy conservation policy, should not cause any significant adverse side-effects to economic growth in those sub-Saharan African countries. Policy implications of the threshold effect for the nexus for individual sub-Saharan African countries are also provided.

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