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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.

Suggested Citation

  • 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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    References listed on IDEAS

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    Cited by:

    1. Arnold, Uwe & Yildiz, Özgür, 2015. "Economic risk analysis of decentralized renewable energy infrastructures – A Monte Carlo Simulation approach," Renewable Energy, Elsevier, vol. 77(C), pages 227-239.
    2. Doytch, Nadia & Narayan, Seema, 2016. "Does FDI influence renewable energy consumption? An analysis of sectoral FDI impact on renewable and non-renewable industrial energy consumption," Energy Economics, Elsevier, vol. 54(C), pages 291-301.
    3. 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.
    4. Hussain Ali Bekhet & Raed Walid Al-Smadi, 2016. "The dynamic causality between FDI inflow and its determinants in Jordan," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 11(1), pages 26-47.
    5. repec:eee:energy:v:148:y:2018:i:c:p:123-133 is not listed on IDEAS
    6. repec:gam:jeners:v:11:y:2018:i:6:p:1536-:d:152205 is not listed on IDEAS
    7. Sunde, Tafirenyika, 2017. "The interaction of Energy Consumption and Economic Growth in South Africa: Assessment from the Bounds Testing Approach," MPRA Paper 86583, University Library of Munich, Germany.
    8. 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.
    9. Furuoka, Fumitaka, 2015. "Financial development and energy consumption: Evidence from a heterogeneous panel of Asian countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 52(C), pages 430-444.
    10. repec:rfa:aefjnl:v:4:y:2017:i:3:p:141-154 is not listed on IDEAS

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    Keywords

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

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