Energy Consumption, Foreign Direct Investment and Economic Growth: A Narrative Survey of Developing Country Evidence

Abstract

The relationship between energy consumption, foreign direct investment (FDI) and economic growth in developing economies has generated a large but fragmented empirical literature, with findings that diverge across countries, energy types, and methodological approaches. This survey narrates evidence through a three-dimensional framework that organizes the literature by regulatory stringency, renewableversus-non-renewable FDI composition, and econometric strength, benchmarked against the four canonical energy-growth hypotheses. The synthesis reveals that the growth hypothesis consistently dominates for non-renewable energy consumption in low-income, energy-importing countries, while the conservation and neutrality hypotheses are more prevalent in middle-income economies with diversified energy mixes. FDI’s impact on growth proves conditional on absorptive capacity: in countries with strong regulatory frameworks and human capital, FDI in renewable energy generates a positive feedback loop, whereas in weak-regulation environments the pollution haven effect produces a tradeoff of short-run growth gains against long-run environmental costs. Methodological analysis indicates that the progressive evolution from bivariate Granger-causality to multivariate vector error correction models and nonlinear ARDL has resolved key identification challenges, yet the evidence base for SubSaharan Africa remains dominated by single-country studies with limited external validity. The Uganda case, where the electricity sector oscillated between privatization (1999) and re-nationalization (2023), illustrates the critical role of policy stability as a threshold condition for energy-sector FDI to translate into sustainable economic growth.