The nexus among foreign direct investment in renewable electricity industry, renewable electricity production, and economic growth in Africa

Abstract

Africa is still struggling to mitigate its electricity insecurity issues. This situation renders foreign direct investment in the renewable electricity industry (FDIREI) and renewable electricity production (REP) to become simultaneously important to Africa. Using a novel dataset of FDIREI, this paper examines the existence and nature of cointegration and causality nexuses among FDIREI, REP, and economic growth (GDP) in 32 African countries over 2003–2019. For methodological robustness purposes; GDP is added. By applying the panel vector autoregression model based-Granger causality test and a static panel data model, which are followed by robustness tests, more informative results are reported. Importantly, we find evidence of the growth hypothesis between REP and GDP, as a unidirectional Granger causality is seen from REP to GDP. Further, the neutrality hypothesis is confirmed among the remaining variables. This left us with the importance of REP in revitalizing African countries’ economic growth. All facets of REP thus should be enhanced.

Keywords:

• foreign direct investment (FDI)
• renewable energy
• renewable electricity
• cointegration
• causality
• Africa

PUBLIC INTEREST STATEMENT

Africa is stricken by electricity insecurity issues. Those issues worsen daily, aggravating all fields of African life. Africa is the region most vulnerable to global warming drawbacks. All of that renders foreign direct investment in the renewable electricity industry [FDIREI] and renewable electricity production [REP] to become simultaneously important to Africa. Using a novel dataset of FDIREI corporations, this paper investigates the cointegration and causality relationships among FDIREI, REP, and economic growth [GDP] in 32 African countries over 2003–2019. Employing econometrics methods, followed by robustness tests, a range of informative findings is reported. The growth hypothesis between REP and GDP is confirmed; a unidirectional Granger causality is revealed from REP to GDP. We further did not find any empirical evidence of the causality between the remaining variables. African policymakers should seriously consider the importance of green energy in revitalizing Africa’s economic growth. All facets of REP thus should be enhanced.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. We use “xtcsd, pesaran abs” and “xtcsd, frees” Stata commands to run Pesaran (2004)and Frees (1995)tests for CSD. “Xtcsd” Stata command introduced by De Hoyos and Sarafidis (2006) allows multiple variables to be tested for cross-sectional independence at the same time.

2. For these panel unit root tests we use: “xtunitroot ht FDIREI, REP, and GDP” for HT test, and “xtcips FDIREI, REP, and GDP, maxlags (1) bglags (1) noc” for CIPS.

3. For the Hausman test, we run: “xtreg FDIREI REP GDP, fe”, “estimates store fixed”, “xtreg FDIREI REP GDP, re”, “estimates store random”, and “ hausman fixed random”, respectively.

4. To run OLS regression, we use “reg FDIREI REP GDP i.Year i.ID, vce (robust)” and for random effects regression “xtreg FDIREI REP GDP i.Year i.ID, re vce (robust)”. Vce (robust) option is employed to correct heteroskedasticity.

5. Selecting optimum lags we follow “varsoc FDIREI REP GDP, maxlag (8)”.

6. We first ran the panel VAR model typing “pvar FDIREI REP GDP, lags (2) fod vce(robust)”. The estimation is done by the generalized method of moment (GMM). Then based on the PVAR model estimates, we typed “pvargranger” to run the PVAR-Granger causality test. We use the options “fod” and “vce(robust)” to capture panel-specific fixed effects and to control for Heteroscedasticity in respective order (Abrigo & Love, 2016).

7. Stata command used is “xthrtest FDIREI REP GDP”.

8. Stata command is “vif”.

9. Stata command for OLS is “regress y x”, and for random effects is “xtreg y x, re”.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Ahmed Rashed

Ahmed Rashed is a doctoral researcher at the University of Malaya, Faculty of Economics and Business, Department of Economics. He is a research assistant at the Helwan University in Egypt, Department of Economics and Foreign Trade. His research interests are currently in the field of International Economics, Renewable Energies, and African Economic Studies. He holds a master’s degree in Foreign Trade Economics from Helwan University, Cairo, Egypt.