The inward FDI - Energy intensity nexus in OECD countries: A sectoral R&D threshold analysis

Over recent years, concerns about the need to reduce energy intensity have intensified due to the increasing volume of greenhouse gas emissions that has amplified problems related to global climate change and environmental pollution. At the same time, foreign direct investment (FDI) has been found to have a prominent effect on energy intensity. This study empirically examines the relationship between sectoral FDI inflows and energy intensity by investigating the possibility of a threshold effect of research and development (R&D) technological absorptive capacity. Our sample covers 34 OECD countries over 1987-2013, with FDI and R&D data disaggregated at three sectoral levels (primary, secondary and tertiary sectors), an analysis that is absent in existing literature. We uncover a significant R&D input threshold in the relationship between FDI inflows to non-primary sectors and energy intensity. FDI inflows to non-primary sectors increase the level of energy intensity when the level of sectoral R&D is below the threshold, but such effect decreases when the sectoral R&D level is above the threshold point. Important implications flow from our findings with respect to the type of FDI and the level of indigenous R&D to be encouraged (or discouraged) by policymakers to effectively reduce energy intensity.