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Questing the three key growth determinants: Energy consumption, foreign direct investment and financial development in South Asia

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  • Khan, Muhammad Azhar
  • Khan, Muhammad Zahir
  • Zaman, Khalid
  • Irfan, Danish
  • Khatab, Humera

Abstract

The relationship between energy led growth, foreign direct investment (FDI) led growth and financial development led growth hypothesis has been widely debated inside the academic circles. There is a general consensus that these factors are a major cause of growth and vice versa. The objective of this study is to analyze the causal relationship among energy consumption, economic growth, relative price, financial development (FD) and foreign direct investment (FDI) in South Asia using a bivariate and multivariate framework. This study covers a sample from 1975 to 2011. The results of cointegration suggests that variables are cointegrated at their first order i.e, I(1) variables and there has been long-run relationship exist between them. The study finds that both energy consumption and economic growth Granger causes each other in the short and long run. The study supported five growth hypotheses in the context of South Asia and these hypotheses have important policy implications in the South Asian region i.e., a) energy led growth hypothesis, b) energy led financial development, c) FDI led growth hypothesis, d) finance led growth hypothesis and e) FDI led relative prices are supported by the findings from this study. The finding of bidirectional Granger causality between energy consumption and economic growth implies that South Asia is an energy dependent country. Energy is a prominent resource for financial sector development in South Asia, further developed financial sector need more energy resources, and this result indicates that energy consumption Granger cause FD and FD Granger cause energy consumption in South Asian region. Moreover, there is a bidirectional link between FDI & economic growth; and between FDI & relative prices of energy in South Asia which explains that FDI increases energy prices in the host countries, whereas brighter growth prospects in the host countries attract an increased flow of FDI in this region. Finally, existing energy infrastructure fails to comply with speedy FDI and thus put strain on the energy channels which leads to higher energy prices. This quest supports the FDI led relative price hypothesis in South Asian region.

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  • Khan, Muhammad Azhar & Khan, Muhammad Zahir & Zaman, Khalid & Irfan, Danish & Khatab, Humera, 2014. "Questing the three key growth determinants: Energy consumption, foreign direct investment and financial development in South Asia," Renewable Energy, Elsevier, vol. 68(C), pages 203-215.
    • Handle: RePEc:eee:renene:v:68:y:2014:i:c:p:203-215
    DOI: 10.1016/j.renene.2014.02.021
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    9. Xueqing Kang & Farman Ullah Khan & Raza Ullah & Muhammad Arif & Shams Ur Rehman & Farid Ullah, 2021. "Does Foreign Direct Investment Influence Renewable Energy Consumption? Empirical Evidence from South Asian Countries," Energies, MDPI, vol. 14(12), pages 1-15, June.
    10. Ghazouani, tarek, 2018. "Reexamining the Foreign direct investment, Renewable energy consumption and Economic growth nexus: Evidence from a new Bootstrap ARDL test for Cointegration," MPRA Paper 103348, University Library of Munich, Germany, revised 11 Sep 2020.
    11. Azra & Shahid Munir & Khurram Abbas & Muhammad Hasnain Khalid & Ihtisham Ul Haq, 2023. "Empirical Investigation of the Impact of Energy intensity and Financial Institutions Efficiency on Environmental Degradation in Pakistan," International Journal of Energy Economics and Policy, Econjournals, vol. 13(1), pages 413-420, January.
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    13. Amri, Fethi, 2016. "The relationship amongst energy consumption, foreign direct investment and output in developed and developing Countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 64(C), pages 694-702.
    14. Augusto Ninni & Ping Lv & Francesca Spigarelli & Pengqi Liu, 2020. "How home and host country industrial policies affect investment location choice? The case of Chinese investments in the EU solar and wind industries," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(4), pages 531-557, December.
    15. Muthana Mohammad Omoush, 2018. "Time Series Analysis among Tourism, Financial Development, FDI and Economic Growth in Jordan," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(12), pages 150-150, December.
    16. Nicholas M. Odhiambo, 2019. "Energy Consumption And Financial Development In South Africa: An Empirical Investigation," Ekonomski pregled, Hrvatsko društvo ekonomista (Croatian Society of Economists), vol. 70(1), pages 41-61.
    17. Tafirenyika Sunde, 2018. "The interaction of energy consumption and economic growth in South Africa: assessment from the bounds testing approach," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 10(2), pages 170-183.
    18. Shahriyar Mukhtarov & Jeyhun I. Mikayilov & Jeyhun Mammadov & Elvin Mammadov, 2018. "The Impact of Financial Development on Energy Consumption: Evidence from an Oil-Rich Economy," Energies, MDPI, vol. 11(6), pages 1-14, June.
    19. Abbasi, Faiza & Riaz, Khalid, 2016. "CO2 emissions and financial development in an emerging economy: An augmented VAR approach," Energy Policy, Elsevier, vol. 90(C), pages 102-114.
    20. Chidozie Njoku & Oscar Chiwira, 2017. "Unbiased Technique in Identifying Appropriate Variables for FDI Inflows Model: A Role of Economic Growth in SADC," Applied Economics and Finance, Redfame publishing, vol. 4(3), pages 141-154, May.

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    Energy consumption; Economic growth; FDI; Financial development; South Asia;
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