Energy Consumption, GDP, and Foreign Direct Investment in Germany

Abstract

This research studies the causal relationship between energy consumption, gross domestic product (GDP), and foreign direct investment (FDI) in Germany for a period of 1971-2010. The empirical results reveal that there is a unidirectional causality running from GDP to energy consumption and from GDP running to FDI in Germany. This is due to the highly rising trends of economic activities in the country which can lead to the expansion in energy consumption. As there is an increase in economic activities within the country, then the growth rate will be in the rising path. As a result, the foreign investors will see the promising future and then invest in the host country. The conservative energy policy is recommended to support the energy saving because it will have little or no adverse effect on GDP. The energy efficiency should be applied by encouraging the use of renewable energy sources in economic activities as an alternative to stimulate the economic growth of the country. Also, the public expenditure should be expanded to increase the country’s economy and attract foreign investors. In addition, the government should support for the service industry such as insurance, finance and banking, and tourism because this type of industry does not consume as much energy as the manufacturing industry does in the overall manufacturing processes. Besides, the government should provide tax credit for the manufacturers who can fulfill the energy efficiency for their operation.