Title: Energy Consumption and Foreign Direct Investment: A Panel Data Analysis for Denmark.
This study consists of a measurement of the relationship between Foreign Direct Investment (FDI) and energy consumption in Denmark. Panel data will be analyzed for the period of last 20 years. Theoretical arguments of energy consumption, its association with the FDI and the determinants of FDI will be presented in the literature review section. Researcher is proposing quantitative method with factor analysis for large dataset and regression analysis to understand the relationship between the variables. Results are expected to demonstrate that Danish economy follows the path of developed countries, which validates the hypothesis of previous studies.
Keywords: Energy consumption, Foreign Direct Investment, Panel data.
Introduction & Background
This study is going to consider the relationship between energy consumption and foreign direct investment (FDI) in Denmark for the period of 1995-2015. Following the econometric strategy, the researcher would like to use unit root test and panel data. The empirical results from the previous studies illustrate that income per capita and political globalization has positive impact on energy consumption (Leitão, 2014). The selected components of globalization (cultural, social and political) (Kraft & Kraftova, 2009) show that these variables promote Danish foreign direct investment (Alfaro & Charlton, 2007; Carkovic & Levine, 2002; Choe, 2003). According to the above mentioned studies, the econometric models also consider two control variables, trade openness and exchange rate. These proxies are positively correlated with FDI.
Current study is aiming to analyze the link between energy consumption and foreign direct investment (FDI). The relationship between FDI and political, cultural and social globalization is also going to be addressed. Very recent studies formulated a theoretical model to explain the energy economics (Cruz & Taylor, 2013; Taylor & Moreno-Cruz, 2013). The researchers demonstrate the importance of energy and the economic growth. They consider the arguments of spatial economics with monopolistic competition.
The energy consumption model was analyzed by several recent studies (Elliott, Sun, & Chen, 2013; Sbia, Shahbaz, & Hamdi, 2014; Zaman, Khan, Ahmad, & Rustam, 2012). The literature shows that there are two positions on the topic of energy consumption and FDI. Thus, an empirical study found a negative impact of FDI on the consumption for energy, which concludes that the FDI is not explained by excessive energy practice (Lee, 2013). However, most econometric models found a positive correlation between FDI and energy consumption, which is explained by excessive use of energy (Omri & Kahouli, 2014).
Purpose and objectives
The main purpose of this empirical study is to contribute to the existing literature in the research field of international business and internationalization of firms. It is certainly to find the relationship between FDI and energy consumption in Denmark. Therefore the objective of this study is to evaluate the impact of foreign direct investments on energy consumption in Danish economy. In addition, it is to analyze the cultural, social and political effects of FDI on Danish economy while globalize the firms. The researcher is also aiming to consider the environmental Kuznets curve arguments (Fodha & Zaghdoud, 2010).
The main research question of this study is:
=> What are the current concerns of Energy Consumption and FDI in Denmark? And what is the current impact of FDI on Danish economy?
Therefore, in order to answer these two main questions the sub-questions are:
1) What is the relationship between Energy consumption and FDI?
2) How are they related to each other?
3) What are the cultural, social and political effects of FDI on Danish economy while internationalize the firms?
4) What are the current impacts of FDI on Danish Economy?
Environmental Kuznets Curve (EKC)
The theoretical arguments of energy consumption, its association with the FDI and the determinants of FDI will be presented in this section. In this relation, it is found another category of ecological economics studies called the environmental Kuznets curve (EKC) (Dinda, 2004; Stern, Common, & Barbier, 1996). This research also considers the EKC issue, which has set examples and it is cited in an empirical study by (Tan, Lean, & Khan, 2014). Researches of EKC usually consider as econometric methodology time series or panel data. The issue of EKC curve in the open economy is considered by Shahbaz et al. (2014). The authors use time series methodology to analyze in Tunisia. This empirical work covers the period of 1971-2010. They concluded that growth, the openness trade, carbon dioxide emissions and energy consumption are co-integrated (Muhammad, Naceur, & Gazi Salah, 2012; Shahbaz, Khraief, Uddin, & Ozturk, 2014).
Carbon dioxide emissions
Another empirical study analyzed the topic of carbon dioxide emissions, urbanization and globalization (Leitão, 2013). The authors applied a dynamic panel data (GMM-system) for the period 1990-2010. Leitão and Shahbaz (2013) considered a sample for 18 countries. The econometric results demonstrate that CO2 decreased in the long run. The variable income per capita and squared income per capita corroborate with EKC hypothesis, i.e., linear income per capita presents a positive sign, and squared income per capita presents a negative impact on CO2 (Leitão & Shahbaz, 2013). The explanatory variables of globalization and energy consumption have a positive impact on CO2. However, urban population is negatively correlated with CO2. This study demonstrates that economic growth is positively correlated with carbon dioxide emissions (Shahbaz & LeitÃ, 2013), which was conducted by using time series. It also show that international trade and energy consumption have a positive impact on CO2 (Ozturk, 2010).
Energy Consumption and Economic Growth
Nayan et al. (2013) use a panel data to evaluate the relationship between energy consumption and economic growth. Researchers consider two equations: one for energy consumption and the other for economic growth (Nayan, Kadir, Ahmad, & Abdullah, 2013). The econometric results demonstrate that energy consumption and economic growth are positively related. The impact of foreign direct investment, the energy and the carbon dioxide emissions on growth were considered by (Lee, 2013).
This study considers a panel data for the period 1971-2009, Lee (2013), formulated three models, the first equation considers the economic growth as dependent variable; the second equation uses the carbon dioxide emissions as dependent variable, and the third model studies the determinants of clean energy. The fixed effects regression (Lee, 2013), shows that FDI, carbon dioxide emissions and energy have a positive effect on economic growth. Sbia et al., (2014) consider the relationship between FDI and energy consumption in UAE for the period 1975-2011. This study uses multivariate time series (ARDL, VEC model, and Granger causality), where the researcher cited the empirical study of (Leitão, 2014). The authors found a negative association between FDI and energy consumption.
The openness trade also presents a negative association with energy consumption. The energy and FDI applied to the Chinese case was analyzed by Elliot et al. (2013). The authors consider a panel data for the period 2005-2008. They formulated an econometric model based on EKC literature (Elliot et al. 2013). The results of this study demonstrate that income per capita and squared income per capita are according to EKC assumptions. Elliot et al. (2013) also found a negative sign between FDI and energy consumption. Using a dynamic panel data for the period of 1990-2011 by Omri & Kahouli, 2014, found a positive impact of FDI and economic growth on energy consumption. The authors consider a sample for 69 countries (high- income, middle-income and low-income countries). Moreover, Zaman et al., (2012) found a positive correlation between FDI and energy.
The energy consumption, economic growth and CO2 were investigated by (Dritsaki & Dritsaki, 2014). The authors consider the relationship between energy consumption, economic growth and CO2 for Greece, Spain, and Portugal using the panel data (OLS, FMOLS, and DOLS) for the period of 1960- 2009. The econometric results demonstrate that CO2 and economic growth have a positive impact on energy consumption. Reflection about the association between energy in use, income and carbon dioxide emission were done in a study by (Withey, 2014). The authors from several other studies on different economies of different regions demonstrate the same results such as the studies by (Farhani & Ben Rejeb, 2012; Ozturk & Bilgili, 2015). These concepts are according to classical theories of location and internationalization models (Caves, 1971; Hymer, 1976). Another study by (Cavallari & d'Addona, 2013) use a gravity model for explaining the determinants of FDI. The authors selected 24 OECD countries for the period 1985-2007. As econometric strategy, the authors used the fixed effects and the Heckman model.
This section outlines and explains the methodology and methods, which will be employed to achieve objectives of this proposed research. This empirical study is going to adopt quantitative method with intent to do deductive analysis. The researcher proposes to formulate four equations to evaluate the relationship between energy consumption and the determinants of FDI (Leitão, 2014). Considering the empirical research of (Sbia et al. 2014; Dritsaki and Dritsaki 2014; Withey 2014; Farhani and Rejeb 2012; Elliot et al. 2013; Muhammad et al. 2012; Leitão, 2014) the first and second equations explain the consumption for energy. The dependent variable is energy consumption for the period of 1995-2015.
Equation 1: Energy consumption = Income per capita + Squared income per capita + CO2 emissions + Danish foreign direct investment
Equation 2: Energy consumption = Income per capita + Danish foreign direct investment + CO2 emissions + Openness trade + Political globalization.
The third equation considers the relationship between carbon CO2 emissions. The fourth equation evaluates the determinants of FDI. Dependent variable is Danish inflows by FDI for the period of 1995- 2015.
Equation 3: CO2 emissions = Income per capita + Squared income per capita + Energy consumption + Danish foreign direct investment
Equation 4: Danish foreign direct investment = (Cultural + Social + Political) Globalization + Openness trade + Exchange Rate (Dreher 2006, and Dreher et al. 2008)
Empirical data collection
Data of this study will be collected from the World Bank website and from the Organization for Economic Co-operation and Development (OECD) dataset (Leitão, 2014). The explanatory variables will be determined from KOF index Globalization from Swiss Federal Institute of Technology Zurich, which is similar strategy of the empirical study by (Dreher, 2006; Dreher & Gaston, 2008). The independent variables of exchange rate are from World Bank (World Development Indicators). All these data will be gathered between the periods of 1995-2015.
Factor analysis and regression analysis
The researcher will conduct factor analysis in order to obtain a manageable data from a large dataset followed by regression analysis to analyze the relationships between all variables. These are going to be in natural logarithms following the strategies of empirical researches by (Sbia et al. 2014; Dritsaki and Dritsaki 2014; Withey 2014; Farhani and Rejeb 2012).
Research processes can be divided into two major categories namely qualitative and quantitative (Saunders, Saunders, Lewis, & Thornhill, 2011). Qualitative methods are those methods used in analyzing qualitative data. It is more likely to look into people’s in-depth feelings, for example, attitude (Miller & Kirk, 1986), unlike quantitative research, which uses ad hoc procedures to define and measure variables (Seale, 1999), qualitative research tends to focus on describing the process of how we define and measure variables in everyday life (Silverman, 2000). On the other hand, quantitative processes are those, which are used for deductive analysis. Moreover, qualitative researches find precise results of the studies with ‘who’ or ‘what’ research questions (Savin-Baden & Major, 2013).
This study is to measure the relationship between energy consumption and foreign direct investment. This is also to investigate cultural, social and political globalization impact of FDI on Danish economy for the period of 1995-2015. The literature review demonstrates that energy consumption and foreign direct investment are complementary. The association between energy and FDI usually utilize the assumptions of EKC. In the first equation, this study will consider these hypotheses such as; the income per capita is positively correlated with energy consumption. The squared income per capita presents a negative impact on energy consumption (Elliot et al. 2013). The results of this study are expected to be in line with empirical studies of (Dritsaki and Dritsaki 2014, Withey, 2014). It is to be observed that in the long run, the decreases of climate changes depend on the behavior of society. The results of this study are expected to demonstrate that Danish economy follows the path of developed countries, which is the main motive of international conferences and summits on sustainability for sustainable development. In this context, studies of (Allen, 2007; Cassella, 2007) demonstrate that it is necessary to get change in behavior, where the authors explained a section by several scenarios for the period of 2005- 2060.