Guiding FDI targeting for sectoral energy strategy: PVAR evidence from 43 emerging and developing economies

This study provides sector-level insights to inform energy strategies consistent with SDG 7 and SDG 13. Drawing on a panel of 43 emerging and developing economies (1998–2020), we estimate a GMM panel vector autoregression (PVAR) linking foreign direct investment, sectoral GDP, energy demand, and CO 2 emissions in four sectors of the economy: manufacturing and construction, transportation, commercial and public services, and agriculture and forestry. In manufacturing, FDI shocks increase GDP and are broadly consistent with a short-run halo—lower energy use per unit of output and modest reductions in CO 2 —whereas in agriculture and forestry, they raise GDP but are associated with higher CO 2 and only gradual improvements in energy use; in both cases, these environmental effects are front-loaded and attenuate over time. In transportation, the dynamic links between FDI, energy use, and emissions are generally weak, whereas in commercial and public services, energy use and FDI shocks mainly lead to higher CO 2 emissions. Our findings imply two differentiated policy tracks: first, orienting FDI attraction and aftercare toward greener projects, paired with efficiency standards and capability building in production sectors; and second, demand-side efficiency, electrification, and codes/standards for transportation and public and commercial services so that future investment translates into sustained emissions reductions. The estimated sector-level elasticities provide decision-relevant inputs for energy-systems modelling and policy sequencing.