Determinants of foreign direct investment in wind energy in developing countries

The renewable energy industry is one of the fastest growing industries attracting a great amount of foreign direct investment, being one of the top 5 industries in 2015 in terms of the amount of investment allocated. However, the allocation of foreign direct investment in the sector greatly varies between developing countries. Preceding studies have tried to explain the location determinants of foreign direct investment mainly by looking at the effects of institutional and macroeconomic factors. The renewable energy sector has been supported by various economic, regulatory, and political support policies. Considering the importance of these support policies, the paper analyses their effects on foreign direct investment as location determinants in comparison with that of the widely accepted determinants (institutional and macroeconomic determinants), focusing on wind energy in developing countries. The results show that renewable energy support policies have equivalent or greater effect compared to the widely accepted determinants such as corruption level, price stability, access to finance, and GDP growth. The paper demonstrates the importance of analysing determinants of foreign direct investment focusing on a specific sector rather than looking at overall foreign direct investment. The paper also provides important policy implications including the need to improve the regulatory aspect of renewable energy sector such as access to grid infrastructure in order to attract foreign direct investment into the sector.