Foreign Direct Investment in the Energy Sector: A Catalyst for Economic Growth in Emerging Economies (1975-2024): Evidence from the Pre- and Post-COVID-19 Periods

Abstract

This comparative study examines the evolving relationship between foreign direct investment (FDI) in the energy sector and economic growth in emerging economies, distinguishing between the pre-COVID-19 period (1975-2019) and post-COVID-19 period (2020-2024). Employing a comprehensive panel data framework with advanced econometric techniques including CS-ARDL, AMG, Westerlund cointegration, and Granger causality tests, the analysis reveals fundamental structural changes in the FDI-growth nexus. Most notably, FDI transitions from having no significant effect on growth in the pre-COVID period to demonstrating statistically significant positive effects in both the short-run (0.037, p=0.031) and long-run (0.042, p=0.041) in the post-COVID era. The analysis also reveals the emergence of cointegration, enhanced error-correction dynamics, and bidirectional FDI-GDP causality post-COVID. The energy sector consistently drives growth across both periods, though with evolving characteristics. These findings have profound implications for policy formulation in emerging economies seeking to harness FDI for sustainable development in the post-pandemic world.

Keywords: Foreign Direct Investment, Energy Sector, Economic Growth, COVID-19, Emerging Economies, Structural Break, Panel Data Analysis.