The asymmetric relationship between financial development, trade openness, foreign capital flows, and renewable energy consumption: Fresh evidence from panel NARDL investigation
Introduction
A continual flow of energy is imperative for sustainable development but not the only ingredient in the development of the process. Furthermore, sustainable development demands stable sources of energy, in the long term that is readily available and sustainable to use at affordable cost without hurting society [1]. In this regard, renewable energy (RE) instead of fossil energy reached an apex position with a consensus of having no environmental effects. Besides that, the importance of renewable energy for sustainable development, environmental protection, and energy supply diversifications is well addressed and discussed in both national and international seminars, symposiums, and conferences. Over the past few decades, therefore, renewable energy emerged as one of the key alternative energy sources in the economy by reducing the reliance on fossil energy namely, gas, oil, and coal [2]. The uses of renewable energy not only improve environmental behavior by reducing carbon emission but also assist in achieving energy security and independence of the country from the world energy market [3]. It is because clean energy plays a decisive role in sustainable economic growth subsidizing the environmental cost which can adversely induce industrial output.
Energy positioned as an important factor in wealth generation in society and plays a significant role in economic development as well. Economic development is not only is the welfare of society but also causes environmental deterioration due to the extensive use of fossil energy. Energy efficiency, therefore, over the last decade became one of the keys discussed fact in different international seminars. The underlying motivation was to find out the effective way of energy consumption for sustainable economic development with green energy. In this regard, renewable energy resources appear one of the effective and efficient solutions and that is why, the connection between sustainable development and renewable energy is well documented [1]. Energy demand persistently increasing with economic expansion and their effects on the environment also obvious. Countries especially developing nations are keen to transform energy consumption with alternative sources like renewable energy to mitigate the environmental effect as well as with disrupting the pace of economic growth [4].
Energy demand arises and augmented in the economy with the interaction of different macroeconomic factors namely, financial development with offering energy-intensive financial services and products such as ATM, Trade openness by stimulating aggregated production level focusing export orientation, foreign capital flows in the form of FDI for industrialization and infrastructural development and so on. Energy-growth nexus, therefore, particularly the effect of renewable energy on economic growth attract researchers, policymakers, and development agencies with positive expectation and number of empirical studies confirmed their positive linkage as well see for an instant, [[5], [6], [7], [8], [9], [10]]. Furthermore, another group of researchers established critical roleplaying by renewable energy in mitigating carbon emission problem and assisting in restoring environmental damage causing by excess CO2 emission in the environment see for example, [2,[11], [12], [13]]. The reduction of primary energy consumption and increase reliance on renewable energy will lead to energy efficiency by reducing greenhouse gas emissions and emerged as an energy solution in the long term.
The main contributions of the study in the existing literature are multifold. First, financial development intensifies energy demand through financial inclusion, which allows accessibility of financial services, credit availability for business enterprise, allowing expansion of production, and capital market development, creating wealth-effects on both produces and consumers in the economy [[14], [15], [16], [17]]. Efficient financial markets, according to Refs. [18]; prompt economic growth by identifying and funding the growth enterprises with the highest value. Moreover [19], produced a comprehensive investigation focusing on financial development effects on the economy. He suggested that financial markets facilitate efficient mobilization of economic resources in the economy and inject forces in increasing aggregated production in the economy. Therefore, Financial development – energy consumption nexus in empirical literature picturized positive image on explaining their existing relationship see for example, [[20], [21], [22]]. With this study, we tried to bring out the new insight by examining the relationship between renewable energy consumption and financial development by incorporation positive and negative shock in financial development, which is still an unscathed area in empirical investigation. One more thing, we used the financial development index rather than relying on one single indicator, which is constructed by considering four widely used financial development indicators through principal components analysis (PCA).
Second, tread openness infers the internationalization of domestic trade by allowing greater production opportunities to satisfy consumer demand outside the national boundaries. Trade – energy consumption nexus confirm trade openness exacerbated energy consumption in the economy due to extra production for satisfying international demand [[23], [24], [25]]. It is implying that exporting finished goods and raw materials required substantial and readily useable energy else international trade would be adversely affected. Consequently, energy became a key player in trade openness. Furthermore, the negative side of heavy reliance on fossil energy consumption in the production process also acknowledges in literature such as, creates a disadvantageous position by increasing the cost of production and eventually fixed a higher price for the domestic product [26]. Replacing fossil energy with renewable energy has a positive effect on the production process with the reduction of production cost. Therefore, the reliance on renewable energy especially for export goods in the world indicates a positive linkage between trade openness and renewable energy consumption. Therefore, we intended the exiting though by investigating how positive and the negative shock in trade openness influenced renewable energy consumption. Furthermore, in recent times, trade-openness nexus getting attention for empirical investigation see for example, [27]; however comprehensive investigation yet to performed focusing Trade-Renewable energy nexus.
Third, foreign capital flows in the form of FDI in developing economy accelerate economic growth with technological advancement, industrialization, infrastructural development, and higher production possibilities for domestic trade expansion [[28], [29], [30], [31]]. In particular, foreign capital flows intensify macroeconomic activities and promotes economic growth and therefore additional energy consumption is obvious [26]. However, it is also observed in the empirical literature that a number of researchers acclaimed that inflows of FDI positively influence energy efficiency to see for example [32]. FDI to developing countries assist effectively to retain energy efficiency and control greenhouse gas emission with the application of advanced technological transfer, it is because FDI treated as the prime channel to transfer technology in the host economy [33,34]. With this study, FDI-energy nexus will move one-step further since we are investigating the existence of a non-linear relationship between FDI inflows and its effects on renewable energy consumption.
The ambition of this study to divulge whether the effects of financial development, trade openness, and foreign capital flows on renewable energy demand are symmetric or asymmetric. To investigate the relationship, we perform several econometric tests namely, Pool group mean ARDL proposed by Pesaran, panel nonlinear ARDL by incorporating nonlinear framework proposed by Ref. [35] and transform into panel form with decomposing independent variable into two additional data set i.e. positive and negative shocks. A standard Wald test was performed for ascertaining the effects running from independent variables to dependent variables both in the short-run and in the long term. In addition, Granger-causality tests under system GMM specification with error correction term by following [36]. Panel ARDL estimations confirmed that in the long run, financial development, trade openness and foreign capital flow positively influence on renewable energy consumption. This conclusion is valid for all three sub-sample groups. Furthermore, Nonlinear ARDL tests unveiled long term asymmetric relationship between financial development, trade openness, foreign capital flows and renewable energy consumption in the long run which is obvious for all panel. However, in the short-run, we also observed asymmetric effects except financial development and trade openness in lower income countries.
This article consists of five sections apart from the introduction, section II dealing with empirical literature reviews. Section III represents motivation and the proposed hypothesis of the study. Section IV explains the data and research methodologies that are applied in the empirical assessment and finally, section V contains the conclusion and policy recommendations of the study.
Section snippets
Financial development and renewable energy consumption
Financial sector development refers to improvement in financial activities which includes banking sector activities, capital market activities, and non-bank financial activities. The nexus between financial development and economic growth extensively investigate in empirical studies see, for example [[37], [38], [39], [40], [41], [42], [43], [44], [45], [46]]. in recent times, the role of financial development also critically examined and enforced with finance-energy consumption nexus. The
The motivation of the study and proposed hypothesis of the study
Economic growth intensifies energy consumption and persistently put pressure on the economy for ensuring the continued supply of energy so that the growth trends remain stable [[91], [92], [93]]. However, the effect of extensive use of energy precisely conventional sources of energy namely, fossil, coal, and oil results in environmental degradation along with the additional cost for the economy. Therefore, over the past decade, countries showed their keen interest in searching and using
Methodology and data of the study
The study used annualized time series data for three panels of the topology taking from the World Bank data set; Lower-income countries (LIC), Lower-Middle income countries (MIC), and Upper-middle income countries.1
Results and discussion
- 1.
Unit root test, Cross-section dependency, and Co-integration
Study variables order of integration were ascertained by performing several unit root test for panel data set name, the Levin–Lin–Chu test [126], the Im–Pesaran–Shin test [127], the Breitung test [128], the Fisher-ADF [129] which have the null hypothesis all the panel contain a unit root. Besides, Hadri [130] Lagrange multiplier (LM) test which has the null hypothesis that all panels are stationary. The result of panel unit root test
Conclusion
The demand for alternative energy consumption, over the past decades, intensifying on the environmental ground. However, the underlying principles enforce countries to explore efficient energy rather than fossil energy such as gas, oil, coal for sustainable economic growth with minimum environment cost. Economic growth is the outcome of interaction among different macroeconomic variables, which includes financial development, trade openness, foreign capital flows and many more. This study
CRediT authorship contribution statement
Md Qamruzzaman: Data curation, Formal analysis, Investigation, Methodology, Writing - original draft. Wei Jianguo: Conceptualization, Writing - review & editing.
Declaration of competing interest
We, at this moment, declaring that no support from any organization for the submitted work; no financial relationships with any organizations that might have an interest in the submitted work; no other relationships or activities that could appear to have influenced the submitted work.
Acknowledgment
We would like to extend our heartfelt graduate and thanks to esteem reviewers in the review process for their guidance and thoughtful suggestions. We also thank the Editor-in-Chief, Soteris Kalogirou, D.Sc for his kind consideration in regards to our study.
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