The impact of institutional distance on foreign direct investment in renewable energy

The importance of foreign direct investment (FDI) for the development of renewable energy (RE) in developing countries has been increasingly recognized. Preceding studies have tried to explain the determinants of RE investments mainly by looking at the effects of the institutional and macroeconomic factors, whereas factors of distance between two countries have not received extensive attention. In this study, based on the concepts of North’s ( 1990 ) institutional economics, we investigate the effect of formal and informal institutional distance on RE investments from developed countries to developing countries. Additionally, we study how RE policies issued by developing countries moderate the effects of institutional distance. Using data of RE investments from 2009 to 2018, we find that distance in both formal and informal institutions significantly reduce the RE investments. In addition, RE policies moderate the effects of institutional distance: the negative relationships between institutional distance and RE investments will be alleviated when developing countries promulgate more RE policies. These findings have important implications for promoting RE development in developing countries.