Decomposing scale and technical effects of financial development and foreign direct investment on renewable energy consumption: evidence from Middle Eastern economies

Subject Areas : Economic Development, Innovation, Technological Change, and Growth

Hossein Alrakabi ¹ , Seyed Kamal Sadeghi ² , Parviz Mohamadzadeh ³

1 - Ph.D. Student in Economic Sciences, Specializing in Economic Development, Faculty of Economics and Management, University of Tabriz, [e-mail]
2 - Professor of the Department of Economic Development and Planning, Faculty of Economics and Management, University of Tabriz, Tabriz, Iran (Crossponding Authur), [e-mail]
3 - Professor of the Department of Economic Development and Planning, Faculty of Economics and Management, University of Tabriz, Tabriz, Iran [e-mail]

Received: 2025-01-20 Accepted : 2025-03-05 Published : 2025-05-17

Keywords: Environmental Pollution, Age Dependency, Urbanization, Energy Consumption JEL Classification: C32, I18, Q20, Q50, R23,

Abstract :

TEnergy is a fundamental pillar of production and economic growth, yet Middle Eastern countries' heavy reliance on fossil fuels, despite their renewable energy potential, has exacerbated environmental challenges and public health concerns. Financial development and foreign direct investment (FDI) shape renewable energy consumption through scale and technical effects, where the scale effect increases energy demand and emissions. In contrast, the technical effect fosters sustainability via technology transfer and efficiency improvements. This study employs the CS-ARDL model and panel data from 2000 to 2021 to examine the impact of financial development and FDI on renewable energy consumption in selected Middle Eastern countries, revealing that early-stage financial development and FDI lead to inefficient resource allocation and the relocation of polluting industries, reducing renewable energy adoption. In contrast, advanced financial growth and targeted investments enhance sustainability. Additionally, institutional quality and fossil fuel consumption positively influence renewable energy use, while reliance on traditional technologies hinders progress, highlighting the need to strengthen financial infrastructure, attract targeted foreign investment, improve governance, and phase out fossil fuel subsidies to facilitate a sustainable energy transition.

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