The Impact of FDI Inflows and Political Instability on Renewable Energy Growth: The Mediating Role of Energy Policy and Moderating Role of Inflation Rate

Abstract

The transition toward renewable energy in emerging economies requires substantial investment, policy support, and institutional stability. Foreign Direct Investment (FDI) plays a vital role in financing renewable energy projects; however, its effectiveness is often constrained by political instability and macroeconomic volatility. This study investigates the impact of FDI inflows and political instability on renewable energy growth, examining the mediating role of energy policy and the moderating role of inflation. Using panel data from Brazil, Russia, India, China, and Iran over the period 2010–2020, the study employs fixed-effects and random-effects regression models to control for country-specific and time-specific heterogeneity. Renewable energy growth is measured through installed renewable energy capacity, while political instability, inflation, and energy policy indicators are incorporated as key explanatory variables. Mediation and moderation analyses are conducted to assess indirect and conditional effects. The empirical results indicate that FDI inflows have a positive and statistically significant impact on renewable energy growth, highlighting the importance of foreign capital and technology transfer. Political instability negatively affects renewable energy development by increasing uncertainty and discouraging long-term investment. Energy policy is found to significantly mediate the relationship between FDI and renewable energy growth, suggesting that stable and supportive policy frameworks enhance the effectiveness of foreign investment. Inflation emerges as a significant moderating variable, weakening the positive impact of FDI and energy policy by raising project costs and reducing investment returns. The findings underscore the importance of political stability, sound energy policies, and macroeconomic control in attracting FDI and promoting renewable energy expansion. The study offers valuable policy implications for emerging economies seeking to accelerate their transition toward sustainable and low-carbon energy systems.