Economic policy uncertainty and the FDI–energy nexus: evidence from China

This study examines how economic policy uncertainty (EPU) shapes the foreign direct investment (FDI)–energy nexus in China over the period 1990–2024. Moving beyond the conventional assumption of stable investment–energy linkages, the study develops a policy-contingent energy demand framework in which EPU moderates the marginal impact of FDI on per capita energy consumption. Methodologically, the study applies a Fourier-augmented autoregressive distributed lag (ARDL) model, using mean-centred interaction terms to ensure identification, and Fourier Toda–Yamamoto causality tests to accommodate nonlinear dynamics and gradual structural change without imposing discrete break dates. The findings reveal three main results. First, in the baseline model, inward FDI is an energy-augmenting force in China. Second, once interaction effects are considered, EPU exerts a significant contractionary influence on energy consumption, confirming that uncertainty suppresses energy demand through delayed investment and reduced capacity utilisation. Third, and most importantly, the relationship between FDI and energy consumption is state-dependent; the marginal energy elasticity of FDI varies significantly across different levels of policy uncertainty. Causality results further show that policy uncertainty precedes changes in energy consumption, while energy demand conditions influence subsequent investment dynamics, confirming evolving causal structures. This study contributes by introducing policy uncertainty as a moderating mechanism in the FDI–energy relationship. It provides new evidence using a flexible nonlinear framework that reconciles mixed findings in the literature. The results highlight that policy credibility is crucial for translating foreign investment into productive, energy-using capacity, with significant implications for energy planning in emerging economies.