Foreign Direct Investment, Trade Openness and Solar Energy Capacity Addition: Evidence from China using QARDL

Abstract

The world is facing the consequences of human-induced climate change calling for an aggressive shift towards renewable energy. The paper explores the effect of select macroeconomic variables on solar energy generation capacity, which is one of the most important components of the current energy mix. Quantile Auto-Regressive Distributed Lag approach is used in the context of China to explore the effect of gross domestic product (GDP), foreign direct investment (FDI), both inflows and outflows, and trade openness (TO) on solar energy generation. The period of analysis spans from 2002 to 2023, which represents the most recent available data. Earlier periods were rightfully excluded, as the dynamics of solar energy capacity addition were markedly different from the present. The study finds that there is a significant positive relationship between GDP and solar energy capacity addition as expected. More importantly, the study reveals the positive effect of FDI inflows but negative effect of TO on solar energy. Further, it is found that the FDI outflow partly affects the solar energy generation capacity addition. The article advocates for a policy push to optimally manage the FDI and international trade for combating climate change, in line with Sustainable Development Goals, through greener energy production.