Foreign direct investment, environmental regulation, and energy transition—An empirical study based on data from 38 OECD countries worldwide

Abstract

This study formulates a theoretical hypothesis regarding the intricate interplay among foreign direct investment (FDI), environmental regulation, and energy transition. To empirically validate this hypothesis, a comprehensive analysis is carried out on 38 member nations of the Organization for Economic Cooperation and Development (OECD) over the span of 2003 to 2020, utilizing a panel fixed effects model, a panel quantile model, and a panel threshold regression model. The findings of the research indicate that (1) FDI exhibits an inhibitory impact on energy transition and, according to the heterogeneity analysis, FDI significantly inhibits energy transition in developed nations. However, the inhibitory influence on energy transition in developing nations is not as pronounced. (2) A considerable amount of dampening influence is exerted by FDI on energy transition at various stages of the transition and is most apparent when the transition is in the growth phase. (3) A threshold effect is evident in FDI and environmental regulation in relation to energy transition owing to the mismatch between the two developments. Notably, the influence of FDI on energy transition significantly varies based on the stringency of environmental regulation. As formal environmental regulation surpasses a designated threshold, FDI shifted from facilitating to inhibiting the energy transition. The same conclusions were reached when informal environmental regulation was considered as the threshold variable. Drawing from the conclusions of this paper, the countries of the OECD can develop a theoretical framework to formulate foreign investment introduction policies and regulate environmental regulation efforts to promote the energy transition.