Decomposing Scale and Technical Effects of Financial Development and Foreign Direct Investment on Renewable Energy Consumption: Evidence from Middle Eastern Economies

Hossein Alrakabi ¹ ( Ph.D. Student in Economic Sciences, Specializing in Economic Development, Faculty of Economics and Management, University of Tabriz, hussein.abdalhamza@iku.edu.iq )
Seyed Kamal Sadeghi ² ( Professor of the Department of Economic Development and Planning, Faculty of Economics and Management, University of Tabriz, Tabriz, Iran (Crossponding Authur), sadeghiseyedkamal@gmail.com )
parviz mohamadzadeh ³ ( Professor of the Department of Economic Development and Planning, Faculty of Economics and Management, University of Tabriz, Tabriz, Iran pmpmohamadzadeh@gmail.com )

Submited date : 2025-01-20 Accepted date : 2025-03-05

Keywords: Financial Development, FDI, Renewable Energy, Institutional Quality, CS-ARDL Model,

Abstract :

This study investigates the impact of financial development and foreign direct investment (FDI) on renewable energy consumption in selected Middle Eastern countries using the CS-ARDL model and panel data spanning from 2000 to 2021. The findings reveal nonlinear and dual effects, namely scale and technical effects, of these factors. In the initial stages of financial development and FDI, renewable energy consumption decreases due to inefficient resource allocation and the transfer of polluting industries to host countries (scale effect). However, at higher levels of financial development and FDI, resources are directed toward sustainable projects, and technology transfer boosts renewable energy consumption (technical effect).

The negative and significant error correction term (ECM = -0.2) confirms the rapid convergence to long-term equilibrium. Furthermore, institutional quality and fossil fuel consumption exhibit positive and significant impacts on renewable energy consumption. While institutional quality facilitates the transition to cleaner energy, fossil fuel consumption increases domestic and international pressure to invest in renewable energy. On the other hand, the capital-to-labor ratio negatively affects renewable energy consumption, indicating reliance on traditional energy-intensive technologies.

This study emphasizes the need to strengthen financial systems, attract targeted foreign investment, and improve institutional quality. Policymakers are encouraged to phase out fossil fuel subsidies, develop financial and regulatory infrastructures for renewable energy, and invest in research and development (R&D) to expedite the transition to sustainable energy. The findings provide a clear pathway for developing countries, particularly in the Middle East, to reduce dependence on fossil fuels and advance towards sustainable development.

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