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Do Energy Prices Drive Outward FDI? Evidence from a Sample of Listed Firms

Abstract:
Affordable energy is often argued to be a vital condition for manufacturing industries to be able to compete on global markets. Consequently, the idea of introducing a (unilateral) carbon tax is usually opposed on the grounds of potential losses of competitiveness and leakage of economic activity abroad. In this paper, we shed light on one potential channel of such effects - the impact of energy prices on firms' outward FDI. Using an instrumental variable strategy we estimate the longer-term effects on a sample of listed firms from 9 manufacturing sectors in 24 OECD countries over 1995-2008. The results suggest that relative energy prices - that is the difference between domestic energy prices and prices in the potential FDI destination - are significantly and asymmetrically related to firms' outward FDI asset share. Only firms that faced increases in the relative energy prices have increased their international asset position and this effect was relatively small.

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Keywords: Energy prices, FDI, Carbon leakage, Carbon tax

DOI: 10.5547/01956574.41.3.ggar

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Published in Volume 41, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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