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 Journal of Cleaner Production xxx (2017) 1e8

Contents lists available at ScienceDirect

Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Determinants of foreign direct investment in wind energy in

developing countries
Alexander Ryota Keeley*, Yuichi Ikeda
Graduate School of Advanced Integrated Studies in Human Survivability, Kyoto University, Yoshida, Nakaadachicho, Kyoto Sakyo-ku, Kyoto, 606-8306, Japan

a r t i c l e i n f o a b s t r a c t

Article history: The renewable energy industry is one of the fastest growing industries attracting a great amount of
Received 26 December 2016 foreign direct investment, being one of the top 5 industries in 2015 in terms of the amount of investment
Received in revised form allocated. However, the allocation of foreign direct investment in the sector greatly varies between
17 May 2017
developing countries. Preceding studies have tried to explain the location determinants of foreign direct
Accepted 20 May 2017
investment mainly by looking at the effects of institutional and macroeconomic factors. The renewable
Available online xxx
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
Keywords:
Renewable energy
investment as location determinants in comparison with that of the widely accepted determinants
Wind energy (institutional and macroeconomic determinants), focusing on wind energy in developing countries.
Foreign direct investment The results show that renewable energy support policies have equivalent or greater effect compared to
Finance the widely accepted determinants such as corruption level, price stability, access to finance, and GDP
Developing country growth. The paper demonstrates the importance of analysing determinants of foreign direct investment
Support policy 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.
© 2017 Elsevier Ltd. All rights reserved.

1. Introduction growing populations and rapidly expanding economies, developing

“Current and future developments in national and world econo-
mies are closely connected to sustainable, efficient and safe usage of
raw materials and upon energy based on cleaner production concepts
and approaches that are ecologically and economically appropriate for
the short and for the long-term future of society” (Dovì et al., 2009).
Transition to an energy system based on cleaner production tech-
nologies is foremost among these challenges.
One of the 20th century’s defining features was the rise of
economies that are highly dependent on fossil fuel consumption. In
the 21st century, more and more countries are becoming aware of
the importance of increasing the deployment of renewable energy
in order to tackle climate change, air pollution, and to create new
economic opportunities as well as to provide sustainable energy for
people who are still living without access to electricity. With
* Corresponding author.
E-mail addresses: keeley.ryota.22a@st.kyoto-u.ac.jp (A.R. Keeley), ikeda.yuichi.
2w@kyoto-u.ac.jp (Y. Ikeda).
countries in particular are under huge pressure to meet the
growing demand for electricity and to provide electricity to all
(Dincer, 2000). In this paper, the term “developing countries” in-
dicates countries listed as developing countries on the Interna-
tional Monetary Fund’s World Economic Outlook Report (2015).
Considering the expected growth in demand for electricity and the
increasing emission of greenhouse gases in developing countries, it
is imperative to transform not only the energy systems in devel-
oped countries but also those of developing countries as well.
The transformation will not successfully occur unless technol-
ogies are transferred properly, and financial resources are allocated
in a suitable manner. This paper takes a close look at the flow of
foreign direct investment (FDI) in wind energy power plants in
developing countries to examine the factors affecting allocation of
this important financial resource into the renewable energy sector,
and to ascertain to what extent renewable support policies impact
the allocation of FDI financial resources. The costs of renewable
energy projects are highly sensitive to financing terms. Conse-
quently, it is important for policymakers to consider the impacts of

http://dx.doi.org/10.1016/j.jclepro.2017.05.106
0959-6526/© 2017 Elsevier Ltd. All rights reserved.

Please cite this article in press as: Keeley, A.R., Ikeda, Y., Determinants of foreign direct investment in wind energy in developing countries,
Journal of Cleaner Production (2017), http://dx.doi.org/10.1016/j.jclepro.2017.05.106
2 A.R. Keeley, Y. Ikeda / Journal of Cleaner Production xxx (2017) 1e8
renewables support policies on the allocation of FDI (Wiser and
Pickle, 1998).
Regarding FDI, the amount allocated to renewable energy in
developing countries has been approaching that of developed
countries. However, the allocation of FDI differs greatly among
developing countries. The primary objective of this paper is to
understand what factors are determining the allocation of FDI in
renewable energy in developing countries. Considering the
importance of the renewable energy sector specific support policies
such as political support, economic support, and regulatory support
for the diffusion of renewable energy from both theoretical and
empirical perspectives, the authors believe that these renewable
energy sector specific factors are affecting the allocation of FDI as
much as the widely accepted determinants of FDI such as institu-
tional and macroeconomic determinants.
There have been numerous empirical studies on determinants
of FDI. Regardless of the underlying hypothesis, different combi-
nations of various variables have been considered in the preceding
studies and they have provided mixed results both in terms of the
statistical significance and the direction of the causality relation-
ship. This is partly because most of the empirical studies on de-
terminants of FDI have examined the determinants of FDI focusing
on overall FDI (aggregated FDI), but a much a smaller number of
studies have addressed this issue focusing on a specific industry or
sector (Mullen and Williams, 2005) due to difficulties in obtaining
the required data set. Some of the sector/industry level analyses
such as the ones in banking sector (Moshirian, 2001), advertising
sector (Terpstra and Yu, 1988), and legal service sector
(CulleneMandikos and MacPherson, 2002) clearly show that de-
terminants of FDI could differ among different industries. In 2015,
approximately 11% (76
109 US$) of total Greenfield FDI was
allocated into renewable energy sector (FDiintelligence, 2016),
which places it in the top five sectors among all types of FDI.
Despite of the large investment made into the renewable energy
sector, there are hardly any studies analysing the determinants of
FDI in renewable energy sector. Investigating the determinants of
FDI in renewable energy in developing countries would not only
clarify the effectiveness of renewable energy support policies, but
also contribute to showing the importance of sector specific factors
in comparison to the widely accepted determinants, and highlight
the need to investigate determinants of this important interna-
tional financial resource focusing on a specific industry or sector in
future studies.
This paper employs structural equation modelling to analyse the
impact of renewable energy support instruments on the allocation
of FDI in comparison with the widely accepted determinants
focusing on wind energy in developing countries. The results show
that renewable energy support instruments have equivalent or
greater effect compared to widely accepted determinants such as
corruption level, price stability, access to finance, control of cor-
ruption, and GDP growth. The results indicate the effectiveness of
renewable support policies in attracting FDI in the sector, and
demonstrate the importance of analysing determinants of FDI
focusing on specific sectors rather than looking at overall FDI. The
rest of the paper is structured as follows: In section 2, the methods
used for the analysis, exploratory factor analysis and structural
equation modelling, and the data on FDI allocation and variables
that will be taken into the analysis are explained in light of pre-
ceding studies. Section 3 discusses results and Section 4 presents
the conclusion and policy implications derived from the results.
2. Methodology and data
This section first introduces the research methods used in this
study, and later explains the data and variables used for the
Please cite this article in press as: Keeley, A.R., Ikeda, Y., Determinants of foreign direct investment in wind energy in developing countries,
Journal of Cleaner Production (2017), http://dx.doi.org/10.1016/j.jclepro.2017.05.106
analysis. The analysis looks into the effect of a large number of
variables on FDI in wind energy in developing countries. Some of
those variables are taken from preceding studies on FDI, and some
are taken from preceding studies on renewable energy diffusion.
The definition and source of the variables are summarized at the
end of this section, and explained in light of the preceding studies.
The effect of each variable on the amount of FDI in wind energy in
developing countries, and the relation between the variables will
be analysed using exploratory factor analysis (EFA) and structural
equation modelling (SEM).
2.1. Research methods
EFA is used in many fields such as behavioural and social sci-
ences, medicine, economics, and geography as a result of the
technological advancements of computers. The aim of EFA is to
“reduce the dimensionality of the original space and to give an
interpretation to the new space, spanned by a reduced number of
new dimensions which are supposed to underlie the old ones” (Van
and Rietveld, 1993). The output of factor analysis would give clearer
view on the data, and could be used in following analyses (Kokubo
et al., 2006), in this paper, the SEM.
Since the objective of this analysis is to examine the factors
driving FDI in wind energy in developing countries, EFA will be
performed for two cases: using data of years that country received
FDI, and years with no FDI. Considering that both “to invest” and
“not to invest” are investment decisions, by comparing results from
these two cases the appropriate latent factor structure will be
determined. In the analysis, iterated principal factor method is
deployed as a model-fitting method. Since correlations were
observed between the variables, oblique (Promax) rotation with
Kaiser Normalization was selected as a rotation method. The cut-off
line for a rotated factor loading is set as 0.6, which means that only
the rotated factor loadings above 0.6 are statistically meaningful.
Considering the sample size (N ¼ 280), the cut-off line 0.6 is fairly
reasonable (Hoyle, 1995). Econometric software Eviews is used to
perform EFA.
Structural equation modelling is a comprehensive approach for
verifying hypotheses on relationships between observed variables
and latent variables (Kline, 2015). Owing to its comprehensiveness,
there are increasing number of papers in the literature that employ
SEM to verify their hypotheses, including a study on the de-
terminants of FDI in Iran (Jafarnejad et al., 2009), and a study on
drivers behind FDI focusing on Chinese firms (Cui et al., 2014). The
goal of SEM is “to understand the patterns of correlation/covariance
among a set of variables and to explain as much of their variance as
possible with the model specified” (Uysal, 2015). SEM can include
both exogenous and endogenous variables. SEM models not only
the causal relationships between endogenous and exogenous var-
iables, but also the causal relationships between endogenous var-
iables. Path diagrams are often used to depict SEM models. A path
diagram is usually composed of the following: nodes that act as the
variables and arrows that show relationships between these vari-
ables. By convention, a square or rectangle is used for observed, and
an ellipse or circle is used for latent variables. A straight arrow
indicates a causal relationship between the variable. When a path
points from one variable to another, it means that the first variable
affects the second. For example, if s / d, it means to add bks to the
linear equation for d. bk is called the path coefficient. A two-headed
curved arrow indicates the association between the two variables.
Error terms of a variable are represented by a circle with an arrow
to the variable that the term is associated with.
In equations, this can be articulated as follows:
 A.R. Keeley, Y. Ikeda / Journal of Cleaner Production xxx (2017) 1e8 3

plants owned by domestic companies in order to further clarify the

x1 ¼ a1 þ b1 X þ ε1 drivers of FDI in wind energy in developing countries by comparing
x2 ¼ a2 þ b2 X þ ε2 the outcomes of domestic investment and foreign direct invest-
(1)
x3 ¼ a3 þ b3 X þ ε3 ment. Similar to FDI, based on the ownership data, plants that are
y ¼ a4 þ b4 X þ ε4 owned by domestic companies are counted as domestic invest-
For the estimation of the model, there are several estimation ment. Some of the plant data lacked information on the ownership
procedures available. Some of the widely used estimation methods of the plant, which are also counted as domestic investment in the
include ordinary least squares, maximum likelihood (ML), and analysis. From 2008 to 2014, a total of 2626 projects were con-
generalized least squares. Since ML is the most widely used esti- ducted, which accounted for 52,790 MW of wind plants.
mation procedure under the SEM approach due to its efficiency, ML In terms of the composition of ownership of wind energy plants
is deployed for the analysis. For the evaluation of model fit, various in developing countries, the data collected from GlobalData
fit indices have been proposed. In this paper, some of the most revealed that the percentage of FDI of the total amount invested
commonly used fit indices are reported, which include: Compara- greatly varies among countries as shown in Table 1. Although China
tive fit index (CFI), Goodness-of-fit (GFI), and Standardized root and India have installed large capacity compared to other countries,
mean square residual (SRMR). RMSEA is also a commonly used fit Table 1 shows that these two countries are not outstanding in terms
index, however it is known to penalize small samples (Hu and of the amount of FDI.
Bentler, 1998). Considering the sample size of used for the anal-
ysis (N ¼ 280), RMSEA is not included to measure goodness-of-fit of
2.2.1. Variables used for the analysis
the models. In this paper, the model under structural modelling
The variables used in this study are selected based on the review
was created and tested with econometric software STATA. In this
of preceding studies. While there are plenty of empirical studies on
study, in order to clarify the determinants that are particularly
determinants of FDI in general, the number of studies on the de-
important for FDI in wind energy, SEM will be performed for the
terminants of FDI in renewable energy sector is very limited.
case of domestic investment using the same variables used for the
Therefore, the renewable energy sector-specific variables are
case of FDI, and the results are compared with each other.
selected based on reviews of preceding studies related to de-
terminants, barriers, and drivers of investment in renewable en-
2.2. Data
ergy sector. The following presents the widely accepted
determinants and potential renewable energy sector specific de-
Data of existing installed wind plants in developing countries
terminants that will be incorporated into the subsequent analysis
was taken from GlobalData (2015). Data includes location, owner,
of determinants of FDI in wind energy in developing countries,
installed year, and capacity of the plants. Based on the ownership
which are explained in the light of preceding studies.
data, plants that are owned by companies who have their head-
Market potential. Some scholars assert that market size/potential
quarters in countries (home country) different from the country
as proxied by GDP per capita or GDP could be regarded as the most
where the plant is installed (host country) are counted as foreign
robust determinant of FDI (Artige and Nicolini, 2005). Some studies
direct investment in wind energy plants. In case more than one
show that GDP growth rate is a statistically significant explanatory
company owns a plant, the capacity of the plant is simply divided
variable, whereas GDP was not (Khan and Nawaz, 2010).
by the number of owners for convenience sake. Since the amount of
Price stability. “Price stability” usually refers to having a stable
investment for each project is not fully available, the installed ca-
and low rate of inflation that is maintained over an extended period
pacity is taken as the dependent variable in this study as a proxy of
of time. A stable and low rate of inflation, or price stability, is
the amount invested. Based on the collected data, most of the wind
considered to have a statistically positive and significant relation-
energy plants were installed after 2008 as shown in the Fig. 1.
ship with FDI allocation (Ben
acek et al., 2014). A high inflation rate
Therefore, data on wind energy plants installed from 2008 to 2014
creates uncertainty for multinational corporations with regard to
was used in the analysis. From 2008 to 2014, a total of 190 foreign
their assets and liabilities (Nicet-Chenaf et al., 2012). Considering
direct investment projects were conducted, which accounted for
that most investments in renewable energy, including wind energy
7950 MW of wind plants in developing countries. An exploratory
investment, require a long-term payback period, price stability
factor analysis (EFA) followed by structural equation modelling
could strongly affect the decisions of investors.
(SEM) were used to model structured relationships between the
Trade protection. Kojima claims that the impact of trade
variables. Also, the same analysis was conducted for wind energy

Table 1
Composition of ownership of wind energy plants in top 10 developing countries in
terms of the amount of the wind energy plants installed (MW) Source: GlobalData.

Country Amount owned Amount Owned by Unspecified Total

within Country Foreign Companies Capacity
(MW)

China 32,512 273 13,064 45,849

India 15,917 662 698 17,278
Brazil 5751 472 59 6283
Turkey 3172 15 39 3225
Poland 1428 1308 320 3056
Romania 141 2138 199 2478
Mexico 768 1565 0 2333
Chile 326 371 14 711
South 498 129 0 627
Africa
Fig. 1. FDI in wind energy in developing countries, capacity and number of projects by
Morocco 352 201 51 604
year. Source: GlobalData.

Please cite this article in press as: Keeley, A.R., Ikeda, Y., Determinants of foreign direct investment in wind energy in developing countries,
Journal of Cleaner Production (2017), http://dx.doi.org/10.1016/j.jclepro.2017.05.106
4 A.R. Keeley, Y. Ikeda / Journal of Cleaner Production xxx (2017) 1e8
protection on FDI depends on the specific nature of the investment
(Kojima, 1975). If the aim is to supply domestic markets and over-
come trade barriers, then stricter trade protection makes firms
more likely to substitute affiliate production for exports in order to
avoid the costs of trade protection, which is commonly called tariff-
jumping FDI. On the other hand, if the viability of the investments is
strongly dependent on imported inputs, FDI would be boosted
when there is less strict trade protection. Restrictive trade policies
could limit investors’ ability to import necessary inputs and it in-
crease transaction costs, which discourages conducting FDI because
of the potential negative effect on productive efficiency (Drabek
and Payne, 2002). Previous empirical studies have shown evi-
dence supporting both premises, making the expected result
ambiguous (Caetano and Galego, 2009).
Investment restrictions for foreign investors. There could be in-
vestment restrictions on (1) foreign ownership of business, (2) the
industries and companies open to foreign investors, and (3) per-
formance requirements on foreign companies. The correlation be-
tween investment restrictions and FDI could be intuitively
understood. In fact, in the absence of barriers, capital would flow to
countries where the rate of return on investment and productivity
will be higher. Firms tend to invest in countries with less restrictive
regulations on capital flows.
Access to finance. Access to finance is another key determinant
of FDI empirically examined in preceding studies (García and Navia,
2003). Some scholars have empirically shown that the poorer
relative access to finance for Japanese companies in the 1990s has
strongly effected the fall in Japanese FDI (Klein et al., 2002).
Labor cost/quality. Labor cost and labor quality are believed to be
key determinants of FDI affecting decisions of potential investors
(Kinoshita and Campos, 2003). Not only the minimum wage, but
also regulatory aspects such as hiring and firing restrictions could
be regarded as key determinants.
Corruption. Host country’s level of corruption is perceived to be
one of the significant determinants for FDI allocation. Theoretically,
corruption can be considered as an additional tax on profits (Al-
Sadig, 2009), which negatively affects the profitability of in-
vestments. Therefore, corruption could greatly affect FDI allocation
decisions.
Government effectiveness. Effective government can positively
affect investors’ business by reducing heavy bureaucracy, the
overall time and procedures it takes to finish them (Sedik and
Seoudy, 2012). Stein and Daude (2001), by estimating a gravity
model of bilateral FDI, provide empirical evidence that improve-
ment in government effectiveness increases FDI by a factor of
nearly 4. Based on these studies, government effectiveness, which
could be measured by the quality of policy formulation and
implementation and the commitment of the government to the
policies, and the quality of public services, could be considered as
one of the key determinants of FDI.
Regulatory quality. High quality regulation is another key
determinant for foreign investors. Fazio and Talamo claims that
high quality regulation facilitates the FDI by reducing negative ef-
fects of market unfriendly policies such as restrictions on move-
ment of capital, intervention of government, and price controls
(Fazio and Chiara Talamo, 2008).
Rule of law. Since future returns will be protected in the presence
of the rule of law, rule of law has strong impact on the long-term
value of assets (Hoff and Stiglitz, 2005). Especially considering
that renewable energy, including wind energy investment, requires
long-term payback periods, the existence of the rule of law could
strongly impact the decision-making of investors.
Political stability. Political stability ensures the continuity of FDI
projects especially for those projects that are affected greatly by
existing policies (Asiedu, 2002). Since most of the FDI projects are
Please cite this article in press as: Keeley, A.R., Ikeda, Y., Determinants of foreign direct investment in wind energy in developing countries,
Journal of Cleaner Production (2017), http://dx.doi.org/10.1016/j.jclepro.2017.05.106
long-term investments, foreign investors avoid investments if there
are threats that could negatively affect their future returns (Fazio
and Chiara Talamo, 2008). Edwards (1990) has empirically shown
that when there is high political risk, most multinational com-
panies avoid FDI in the country. In some cases, political instability
leads to change in regulations and economic supports, which is a
great threat to FDI projects in the renewable energy sector.
Renewable Energy Policies. According to REN21, more than 164
countries had renewable energy targets in the early 2015, and
around 145 countries had some types of support policies for
renewable energy in place (REN21, 2015). These policies can greatly
affect development of renewable energy technologies. In the case of
wind energy, some studies claim, “the biggest influence on wind
power deployment is the nature of the policy instrumentation rather
than even the resource base for wind power” (McIlveen et al., 2010).
Based on the categorization of IEA/IRENA Joint Policies and
Measures Database, which covers renewable energy policy mea-
sures deployed at country-level all over the world, renewable en-
ergy support policies can be divided in three types: Economic
Support, Regulatory Support, and Political Support. Political Sup-
port includes institutional creation, strategic planning and target
setting. According to the IEA/IRENA Joint Policies and Measures
Database, Regulatory Support includes existence of auditing, pri-
ority grid access, and codes and standards. Political support in-
cludes institutional creation, strategic planning and target setting.
Economic Support includes existence of a feed-in tariff system (FiT),
renewable portfolio standards (RPS), tradable renewable energy
certificates (REC), and tax relief. Pfeiffer and Mulder studied the
diffusion of renewable energy technologies (except hydro-energy)
in 108 developing countries during 1980e2010. They found that
economic and regulatory support policies have strong effects on the
diffusion of renewable energy technologies, whereas policy support
has negative effect on the diffusion of renewable energy technol-
ogies (Pfeiffer and Mulder, 2013).
Renewable Energy Economic Support. Feed-in tariff (FiT) is a
policy tool adopted the most among the various types of economic
supports, which facilitated rapid spread of wind energy and solar
energy in various countries. FiT offers a guaranteed price for elec-
tricity generated by renewable energy with a purchase obligation
by the utilities for a fixed long-time period contracts ranging from
10 to 20 years (Jacobsson and Lauber, 2006). Eyraud et al. (2013)
provides empirical evidence that economic support such as FiT,
RPS, and REC have positive impact on both domestic and foreign
inward investment.
Renewable Energy Regulatory Support. Pîrlogea (2011) reviews
investment barriers to renewable energy primarily focusing on
Romania, and asserts that regulatory aspect such as access to grid
infrastructure and obtaining technological permits are major bar-
riers. Especially for investors coming from outside the host country,
transparent and straightforward access to the grid, and clear
technical standards would be essential for smooth and secured
project development.
Renewable Energy Political Support. Abdmouleh et al. (2015) re-
view the mechanisms for facilitation of development of renewable
energy deployed in various countries, and shed light on the
importance of strong political support at national, regional or local
level, through smooth bureaucratic application procedures, target
setting, and development planning.
Renewable energy target and development plan, and creation of
institution that serves as one-stop agency for investors in renew-
able energy projects would greatly support foreign investors.
All of the variables explained in this section and their data
sources are summarized in Appendix. Descriptive statistics of the
variables are provided in Table 2.
 A.R. Keeley, Y. Ikeda / Journal of Cleaner Production xxx (2017) 1e8 5

Table 2 of FDI, the first hypothesis is:

Descriptive statistics of the variables.
H1. Countries with better institutional environment receive more
Variable Obs Mean Std. Dev. Min Max
investments.
GDPgrowth 280 3.553278 3.147155 7.820885 10.63171
FDI 280 3.74383 4.32563 16.15452 47.90748 Similarly, based on the empirical results presented by scholars
MF 280 73.53107 6.113473 47.3 86.5 such as Jadhav (2012), which show that macroeconomic environ-
TF 280 74.47036 12.94037 0 88.6 ment such as trade openness, wage rate, tax rate, and the market
IF 280 49.91071 19.73142 0 90
size are the strong determinants of FDI in general, the second and
FF 280 47.75 14.98894 10 70
LF 280 62.66857 12.92094 21.7 88.7 third hypotheses are:
CC 280 47.14402 20.90086 11.48325 91.38756
GE 280 54.36607 17.5621 16.74641 90.38461
H2. Countries with better macroeconomic environment receive
RQ 280 51.99962 20.43019 2.870813 93.30144 more investments.
RoL 280 48.13928 19.17792 7.582938 88.46154
PS 280 37.30334 24.52984 0.4716981 90.7767
H3. Bigger market potential attracts more investments.
REEconomic 280 0.475 0.5002687 0 1
Next, following the argument of the study conducted by Eyraud
REPolicy 280 0.5464286 0.4987311 0 1
RERegulatory 280 0.4 0.4907751 0 1 et al. (2013), and in order to test the effectiveness of regulatory
support and economic support for renewable energy on attracting
FDI, the fourth hypothesis is:
3. Results H4. Existence of regulatory support and economic support for
renewable energy attracts more investments.
First, exploratory factor analysis was conducted with the data of
Finally, based on the argument that the country’s investment
years that country received FDI, and years with no FDI. Following
environment is determined to a great extent by its institutional
that the same analysis was conducted for domestic investment.
level (Healy and Co ^ te

, 2001), the fifth hypothesis is proposed.
Based on the results, only the variables that have factor loadings
Similarly, in order to examine the effect of institutional environ-
above the cut-off line in both cases are selected as variables that
ment and macroeconomic environment on the deployment of
constitute the final latent factors and their constructs.
regulatory and economic support for renewable energy, the sixth
Table 3 shows the final result in the case of FDI, which is iden-
hypothesis is proposed:
tical to the results of domestic investment. Considering the con-
structs of the latent factors, latent factor 1 (F1) is named H5. Better institutional environment promotes better macroeco-
Institutional, and latent factor 2 (F2) is named Econmic. Although nomic environment.
RE Economic and RE Regulatory showed factor loadings above 0.6
H6. Countries with better institutional environment, and better
in only one of the analyses (years with investments, and years with
macroeconomic environment are apt to employ regulatory and
no investments) in both FDI and domestic investment cases,
economic support for renewable energy.
considering theoretical and empirical importance of these factors,
these factors will be taken into the analysis of structural equation Fig. 2 shows the results in the case of FDI. Correlation results
modelling as exogenous variables. Similarly, GDP growth, which is a showed high correlation between RE Economic and RE Regulatory
great indicator for market potential, will be taken into the analysis with the value 0.508. In this model, the curved arrow is placed
as an exogenous variable considering its importance as a FDI driver. between residuals of RE Economic and RE Regulatory. This can be
RE Policy didn’t have loading factors over the cut-off line in any of justified considering that the correlation between the two can be
the analyses. Considering that policy support for renewable energy interpreted as the “government’s willingness to support renewable
has empirically tested to show a marginal effect on the diffusion of energy”. The goodness of fit measures for the structural model
the renewable energy in developing countries according to the show acceptable fit in all of the three indices (Table 4).
study conducted by Pfeiffer and Mulder (2013), and also, those high Table 5 presents the statistical significance for each path
renewable energy target and plans of the developing countries are
often deemed doubtful lacking feasibility (Dornan, 2012), it is
reasonable not to include RE Policy in the succeeding analysis.
Based on the outputs of the EFA, the author developed a struc-
tural equation model including latent variables Institutional and
Economic, and variables RE Economic, RE Regulatory, GDP growth,
and capacity. Capacity indicates the amount of wind energy plants’
capacity invested, which is used as a proxy for investors’ invest-
ment decision. The structural equation model is developed based
on the following hypotheses.
Following the argument by numbers of studies including the
one by Büsse and Hefeker (2007) that political stability, corruption,
law and order, and quality of bureaucracy are strong determinants

Table 3
Summary of variables for FDI and domestic investment.

F1: Institutional F2: Economic F3: Exogenous Variables

CC TF RE Economic
RoL FF RE Regulatory
GE IF GDP growth
Fig. 2. Structural model of FDI.

Please cite this article in press as: Keeley, A.R., Ikeda, Y., Determinants of foreign direct investment in wind energy in developing countries,
Journal of Cleaner Production (2017), http://dx.doi.org/10.1016/j.jclepro.2017.05.106
6 A.R. Keeley, Y. Ikeda / Journal of Cleaner Production xxx (2017) 1e8

Table 4
Goodness-of-fit measures for the structural
equation model.

CFI 0.923
GFI 0.912
SRMR 0.052

Table 5
P-value for each path.

i j p-value

Economic Institutional 0.021

RE Regulatory Economic 0.034
RE Regulatory Institutional 0.843
RE Economic Economic 0.047
RE Economic Institutional 0.480
TF Economic 0.016
IF Economic 0.014
FF Economic 0.017
CC Institutional 0.000
RoL Institutional 0.000 Fig. 3. Structural model of domestic investment.
GE Institutional 0.000
capacity Economic 0.000
capacity Institutional 0.044
capacity RE Regulatory 0.000 This is the same even if the indirect effect is taken in account, which
capacity RE Economic 0.062 makes the total effect of Institutional as 0.04.
capacity GDP growth 0.462 Next, the results of the case of domestic investment are pre-
sented to further analyse the FDI drivers in wind energy in devel-
oping countries by comparing them with one another (Fig. 3).
depicted in the developed model. The results show that paths from Measures of goodness to fit of the model Table 7 show that the
Institutional to RE Economic and RE Regulatory are statistically model’s fit is above the acceptable level. Concerning the statistical
insignificant, with the p-value 0.48 and 0.84 respectively. Further- significance for each path, the same as in the case of FDI, the paths
more, the path from GDP growth to Capacity is also insignificant (p- from Institutional to RE Economic and RE Regulatory are statisti-
value: 0.46); showing that market potential is not a strong deter- cally insignificant with the p-value 0.46 and 0.82 respectively. In
minant for FDI in wind energy in developing countries based on contrast to the case of FDI, the path from RE Regulatory to Capacity
this model. The number next to each arrow in the Fig. 2 indicates is also statistically insignificant (p-value: 0.738) as shown in
the mean standardized structural and measurement weights. It Table 8.
shows that Institutional has strong effect on the Economic (path From the comparison of the results of the case of FDI and the
coefficient: 0.53), and Economic affects the deployment of RE case of domestic investment, it is notable that GDP growth, which
Economic and RE Regulatory support (path coefficient 0.26 and 0.31 had statistically insignificant effect on Capacity in the case of FDI,
respectively). Taking these indirect effects into account, the total has significant (p < 0.01) and strong effect on Capacity (path co-
effect of each variable on invested capacity is summarized in efficient: 0.24) in the case of domestic investment (Table 9). This
Table 6. Combining the direct effects and indirect effects, Economic further emphasizes that the market potential is not an important
has the largest effect (path coefficient: 0.31), followed by RE Reg- variable in the case of FDI in wind energy in developing countries.
ulatory (path coefficient: 0.29) and RE Economic (path coefficient:
0.12). The direct effect of Institutional to capacity shows a very
small but negative effect with statistical significance (p < 0.05). The Table 7
implication of this result is that lower levels of Institutional envi- Goodness-of-fit measures for the structural
equation model.
ronment will lead to more deals. Although this result is question-
able from theoretical standpoint, since the effect is very small (path CFI 0.911
coefficient: 0.14), it is better to interpret this result as Institutional GFI 0.912
SRMR 0.053
environment having less to none effect on the investment decision.

Table 6
Total effect (sum of direct and indirect effect) of each variable on capacity.

Total Effect: Standardized Economic Institutional RE Regulatory RE Economic TF IF FF CC RoL GE GDP growth capacity

Economic 1 0.53 0 0 0 0 0 0 0 0 0 0
Institutional 0 1 0 0 0 0 0 0 0 0 0 0
RE Regulatory 0.31 0.18 1 0 0 0 0 0 0 0 0 0
RE Economic 0.26 0.19 0 1 0 0 0 0 0 0 0 0
TF 0.71 0.38 0 0 1 0 0 0 0 0 0 0
IF 0.77 0.41 0 0 0 1 0 0 0 0 0 0
FF 0.88 0.47 0 0 0 0 1 0 0 0 0 0
CC 0 0.94 0 0 0 0 0 1 0 0 0 0
RoL 0 0.96 0 0 0 0 0 0 1 0 0 0
GE 0 0.90 0 0 0 0 0 0 0 1 0 0
GDP growth 0 0 0 0 0 0 0 0 0 0 1 0
capacity 0.31 0.04 0.29 0.12 0 0 0 0 0 0 0.04 1

Please cite this article in press as: Keeley, A.R., Ikeda, Y., Determinants of foreign direct investment in wind energy in developing countries,
Journal of Cleaner Production (2017), http://dx.doi.org/10.1016/j.jclepro.2017.05.106
 A.R. Keeley, Y. Ikeda / Journal of Cleaner Production xxx (2017) 1e8 7

Table 8 variables as exogenous variables, structure equation modelling was

P-value for each path. conducted.
i j p-value By comparing the results of the case of FDI and domestic in-
Economic Institutional 0.004
vestment, the following points are highlighted: (1) Economic sup-
RE Regulatory Economic 0.012 port for renewable energy has strong and significant effect on
RE Regulatory Institutional 0.819 investment decision in both FDI (path coefficient: 0.12) and do-
RE Economic Economic 0.022 mestic investment (path coefficient: 0.28) cases. (2) Regulatory
RE Economic Institutional 0.459
support for renewable energy is especially important for foreign
TF Economic 0.003
IF Economic 0.002 investors (path coefficient: 0.29), whereas economic support has
FF Economic 0.002 stronger effect than regulatory support for domestic investment.
CC Institutional 0 (3) Widely accepted FDI determinants, such as access to finance,
RoL Institutional 0
trade openness, and general investment restrictions still have
GE Institutional 0
capacity Economic 0
strong effect on investment decision for foreign investors. (4)
capacity Institutional 0.247 Institutional aspects such as government effectiveness, control of
capacity RE Regulatory 0.738 corruption, and rule of law have weak effects as the location de-
capacity RE Economic 0 terminants of FDI in the sector. (5) Countries with growing markets
capacity GDP growth 0
have more domestic investment. However, market growth has a
statistically insignificant effect on investment decision for foreign
investors. These results especially imply that although having
In the domestic investment case, RE Economic has the strongest economic support policies including a price signal such as FiT
impact on the investment decision (path coefficient: 0.28), fol- promote domestic investment, it is not enough for creating an
lowed by GDP growth (path coefficient: 0.24). It is notable that attractive environment for FDI. Since foreign investors perceive lack
although existence of regulatory support for renewable energy has of proper regulatory support as a great risk, economic support
the strongest direct effect on investment decision for FDI, in the policies need to be complemented with well-structured and cred-
domestic investment case regulatory support is rather statistically ible regulatory support policies in order to attract foreign in-
insignificant and economic support has the strongest effect. Lastly, vestments in the renewable energy sector. This point is clearly
Economic has a statistically significant and negative effect. This is shown by the strong impact of regulatory support for renewable
questionable from theoretical point of view, but it is possible that a energy on FDI. Especially, providing guaranteed access to electricity
country employs economic support for renewable energy as an grid is vitally important since the logistics and delay in grid
industrial strategy although it has a low quality macroeconomic connection can significantly affect the cost of the projects
environment. This requires more in depth analysis with case (Mourelatou et al., 2001). Finally, based on the results, improving
studies. access to finance, trade openness, and easing general investment
restrictions can also be strong measures to attract more FDI in
renewable energy sector.
4. Conclusions and policy implications
This paper has empirically shown the effectiveness of renewable
support policies on attracting FDI, and also the paper highlights the
Renewable energy industry is one of the fastest growing in-
importance of analysing determinants of FDI focusing on a specific
dustries attracting great amounts of FDI. The industry attracted
sector rather than looking at overall FDI in order to understand the
more than 11% (76
109 US$) of the total FDI in 2015 making it one
factors affecting investment decisions more clearly.
of the top 5 industries in terms of the amount of FDI allocated.
Considering the importance of this industry, and the great FDI
allocation differences in renewable energy among developing Funding
countries observed from the collected data, the analysis looked at
the impact of various factors on the allocation of FDI focusing on This work was supported by Graduate School of Advanced In-
wind energy in developing countries. Determinants included both tegrated Studies in Human Survivability, Kyoto University with
theoretically argued and empirically tested variables such as Leading University Program Grant.
institutional and macroeconomic determinants, and renewable
energy sector specific policies. After conducting exploratory factor Appendix
analysis, the variables constructed two latent factors: Institutional
and Economic. Thereafter, adding renewable energy specific Definitions of variables and their sources

Table 9
Total effect (sum of direct and indirect effect) of each variable on capacity.

Total Effect: Standardized Economic Institutional RE Regulatory RE Economic TF IF FF CC RoL GE GDP growth capacity

Economic 1 0.53 0 0 0 0 0 0 0 0 0 0
Institutional 0 1 0 0 0 0 0 0 0 0 0 0
RE Regulatory 0.31 0.18 1 0 0 0 0 0 0 0 0 0
RE Economic 0.26 0.19 0 1 0 0 0 0 0 0 0 0
TF 0.71 0.38 0 0 1 0 0 0 0 0 0 0
IF 0.77 0.41 0 0 0 1 0 0 0 0 0 0
FF 0.89 0.47 0 0 0 0 1 0 0 0 0 0
CC 0 0.94 0 0 0 0 0 1 0 0 0 0
RoL 0 0.96 0 0 0 0 0 0 1 0 0 0
GE 0 0.90 0 0 0 0 0 0 0 1 0 0
GDP growth 0 0 0 0 0 0 0 0 0 0 1 0
capacity 0.17 0.003 0.02 0.28 0 0 0 0 0 0 0.24 1

Please cite this article in press as: Keeley, A.R., Ikeda, Y., Determinants of foreign direct investment in wind energy in developing countries,
Journal of Cleaner Production (2017), http://dx.doi.org/10.1016/j.jclepro.2017.05.106
8 A.R. Keeley, Y. Ikeda / Journal of Cleaner Production xxx (2017) 1e8

Variable Definition Data Source

GDP growth Growth of annual GDP WDI

FDI
Monetary Freedom (MF)
Trade Freedom (TF)
Investment Freedom (IF)
Financial Freedom (FF)
Labor Freedom (LF)
Control of Corruption (CC)
Government Effectiveness (GF)
Regulatory Quality (RQ)
Rule of Law (RoL)
Political Stability (PS)
RE Economic
RE Policy
RE Regulatory
FDI net inflows as a percentage of GDP WDI
Price stability with an assessment of price controls The Heritage Foundation
Absence of tariff and non-tariff barriers The Heritage Foundation
Investment restrictions on foreign investors The Heritage Foundation
Extent of financial and capital market development etc. The Heritage Foundation
Regulation concerning minimum wages, laws inhibiting layoffs, and severance requirements etc. The Heritage Foundation
Extent to which public power is exercised for private gain WDI
Quality of policy formulation and implementation, and the government’s commitment to such policies WDI
Ability of the government to formulate and implement sound policies and regulations WDI
Extent to which agents have confidence in and abide by the rules of society WDI
Measurement of the likelihood of political instability WDI
Dummy variable taking value 1 from the first year of implementation of economic support for the IEA/IRENA, REN21
promotion of RE onward
Dummy variable taking value 1 from the first year of implementation of policy support for the IEA/IRENA, REN21
promotion of RE onward
Dummy variable taking value 1 from the first year of implementation of regulatory support for the IEA/IRENA, REN21
promotion of RE onward

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