The Causal Effects of Foreign Direct Investment on Renewable and Nonrenewable Energy Consumption: Evidence from Malaysia and Indonesia

This study examines the relationship between FDI and energy consumption in Malaysia and Indonesia from 1990 to 2023, focusing on total energy consumption, renewable energy consumption, and nonrenewable energy consumption. Using the Autoregressive Distributed Lag (ARDL) bounds test for cointegration, the analysis identifies significant long-run relationships between FDI and energy variables in both countries. The Toda-Yamamoto non-causality test further reveals unidirectional causality in various directions. In Malaysia, FDI drives both the total energy consumption and nonrenewable energy consumption, indicating its role in industrial activities and reflecting a potential pollution haven effect. Meanwhile, renewable energy consumption influenced FDI, highlighting the potential of renewable energy infrastructure to attract foreign investments and balance the energy mix. In Indonesia, total energy consumption and renewable energy consumption exhibit unidirectional causality to FDI, emphasizing the importance of energy availability and renewable energy development in attracting foreign capital. Additionally, FDI drives nonrenewable energy consumption, underscoring the continued reliance on fossil fuels and suggesting a pollution haven effect. These findings underscore the complex interplay between FDI and energy variables, offering valuable insights for policymakers to balance economic growth with sustainable energy development goals. JEL Codes: Keywords: Energy consumption; renewable energy; nonrenewable energy; foreign direct investment, bound test, Toda-Yamamoto non-causality test