Assessing the influence of foreign direct investment on renewable energy consumption in Somalia: an ARDL model analysis

Abstract

This study examines the impact of Foreign Direct Investment (FDI) on renewable energy consumption in Somalia from 1990 to 2019 using the Autoregressive Distributed Lag (ARDL) model. The findings reveal a positive, statistically significant relationship between FDI, Gross Domestic Product (GDP), trade openness, and renewable energy consumption in the long run. Specifically, a 1% increase in FDI leads to a 0.0000115% increase in renewable energy consumption. Similarly, a 1% increase in GDP leads to a 0.026041% increase in renewable energy consumption. Meanwhile, a 1% rise in trade openness enhances renewable energy consumption by 0.0000280%. Increased foreign investments and economic growth promote the adoption of renewable energy, aligning with sustainable development principles. Conversely, environmental degradation negatively impacts renewable energy consumption. Specifically, a 1% increase in environmental degradation leads to a 0.570376% decrease in renewable energy consumption. Policymakers should incentivize FDI in the renewable energy industry through tax incentives, streamlined regulations, and public-private partnerships. Strategies promoting economic growth and integrating renewable energy objectives are essential, with trade openness facilitating the importation of renewable energy technologies. A limitation of this study is the reliance on yearly data, which may not capture recent developments or short-term fluctuations. Future research should use more granular, up-to-date data to understand the dynamics in Somalia better.

Full text

Assessing the inuence of foreign direct investment on
renewable energy consumption in Somalia: an ARDL model
analysis
Bile Abdisalan Nor and Iqra Hassan Mohamud
Faculty of Management Science, SIMAD University, Mogadishu, Somalia
ABSTRACT
This study examines the impact of Foreign Direct Investment (FDI) on
renewable energy consumption in Somalia from 1990 to 2019 using the
Autoregressive Distributed Lag (ARDL) model. The findings reveal a
positive, statistically significant relationship between FDI, Gross
Domestic Product (GDP), trade openness, and renewable energy
consumption in the long run. Specifically, a 1% increase in FDI leads to
a 0.0000115% increase in renewable energy consumption. Similarly, a
1% increase in GDP leads to a 0.026041% increase in renewable energy
consumption. Meanwhile, a 1% rise in trade openness enhances
renewable energy consumption by 0.0000280%. Increased foreign
investments and economic growth promote the adoption of renewable
energy, aligning with sustainable development principles. Conversely,
environmental degradation negatively impacts renewable energy
consumption. Specifically, a 1% increase in environmental degradation
leads to a 0.570376% decrease in renewable energy consumption.
Policymakers should incentivize FDI in the renewable energy industry
through tax incentives, streamlined regulations, and public-private
partnerships. Strategies promoting economic growth and integrating
renewable energy objectives are essential, with trade openness
facilitating the importation of renewable energy technologies. A
limitation of this study is the reliance on yearly data, which may not
capture recent developments or short-term uctuations. Future research
should use more granular, up-to-date data to understand the dynamics
in Somalia better.
ARTICLE HISTORY
Received 5 June 2024
Accepted 23 October 2024
KEYWORDS
Somalia; renewable energy
consumption; FDI; GDP;
autoregressive distributed
lag
1. Introduction
Energy is essential for meeting fundamental human needs and supporting the manufacturing,
transportation, and agricultural sectors that drive economic development (Shafie et al. 2011;
Zhao et al. 2020). In Somalia, the energy sector has faced significant challenges due to prolonged
conict, political instability, and lack of infrastructure investment. These challenges have resulted
in a heavy reliance on traditional biomass and imported fossil fuels, which need should be changed
to satisfy the country’s expanding energy requirements and are detrimental to environmental sus-
tainability. Transitioning to renewable energy sources presents a viable solution to these issues,
oering sustainable, reliable, and environmentally friendly alternatives.
© 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/),
which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this
article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent.
CONTACT Bile Abdisalan Nor b.abdisalannor@gmail.com
INTERNATIONAL JOURNAL OF SUSTAINABLE ENERGY
2024, VOL. 43, NO. 1, 2422899
https://doi.org/10.1080/14786451.2024.2422899

Foreign Direct Investment (FDI) can transform this transition by providing the necessary capi-
tal, technology, and expertise to develop Somalia’s renewable energy sector. FDI refers to invest-
ments made by foreign entities in another country’s domestic businesses or infrastructure, and it
has been recognised as a critical driver of economic development. For Somalia, attracting FDI in
renewable energy can address the critical gaps in energy access, reduce dependence on fossil
fuels, and stimulate economic growth through job creation and improved productivity.
Vinh et al. (2022) found that foreign direct investment positively impacted renewable energy con-
sumption in 39 countries from 2000 to 2019. This positive correlation demonstrates the role of inter-
national investments in driving the global transition towards sustainable energy systems. Similarly,
Paramati, Ummalla, and Apergis (2016) demonstrated that FDI significantly promoted clean energy
consumption. Their analysis emphasises how FDI helps to the growth of renewable energy technol-
ogy and the development of infrastructure needed to support renewable energy. Emerging econom-
ies, in particular, benefit from FDI as it helps bridge the financial and technological gaps that often
hinder their ability to invest in and adopt clean energy solutions. that FDI has an important impact
in promoting the shift towards renewable energy by providing financial resources, technological
know-how, and best practices from more developed markets. This can lead to improved energy
eciency and reduced carbon emissions, crucial for mitigating climate change.
Somalia faces severe energy insecurity, with a significant portion of its population reliant on
firewood and charcoal for their energy needs (A. A. Warsame et al. 2022). The country remains
among the least electrified globally, Out of a population of around 15, 9 million Somalis lack access
to electricity (World Bank 2019). The primary sources of energy in Somalia include diesel genera-
tors and biomass, which are both unsustainable and environmentally detrimental. Despite ongoing
eorts by the UN to pioneer new approaches in climate security and energy to support peace and
development, Somalia’s energy infrastructure still needs to be developed and heavily dependent on
non-renewable resources.
Somalia’s energy system has been seriously disrupted by the long civil war and subsequent
instability after the fall of the central government in 1991. The United Nations has been working
hard to introduce new energy development and climate security approaches, but weak government
institutions have hindered growth. Reecting the uncertain investing environment, foreign direct
investment (FDI) has dropped significantly in this scenario. After 1991, Somalia’s FDI trend sharply
declined; it continued until around 1999 to stabilise and showed minor uctuations until 2007.
Figure 1 shows the trend of foreign direct investment (FDI) inows into Somalia from 1970 to
2019. Early in the 199 s, FDI remained somewhat low, reecting in ability and conict that
Figure 1. Foreign direct investment, net inflows (% of GDP).
Source: World bank.
2 B. A. NOR AND I. H. MOHAMUD

characterised the civil war period. Notably, in the early 1990s, the FDI suered a notable drop in
line with the start of civil unrest, which left possible investors in a dubious situation. After the con-
ict, FDI slightly increased in 1997 and 1999, although these levels remained moderate. A significant
rise occurred in 2005, with FDI reaching a record high, indicating a possible increase in investor
confidence that may have developed during this time. From 2010 to 2012, FDI fell due to several
causes, including ongoing security concerns, political instability, and poor infrastructure. The sub-
sequent decline from 2010 to 2012 has significantly restricted investment in essential sectors, such
as energy. thus, Low Foreign Direct Investment (FDI) may contribute to energy insecurity in Soma-
lia. However, addressing energy insecurity in Somalia is inextricably linked to revitalising. More-
over, Somalia’s foreign direct investment is significantly lower than that of neighbouring nations
like Ethiopia, Kenya, and Djibouti. FDI requires an in-depth understanding of the underlying chal-
lenges and opportunities for investment in the energy industry.
Several existing studies have been done on this topic (Tan and Uprasen 2022; Doytch and Narayan
2016). However, this research should have addressed Somalia, a nation with unique environmental
and socioeconomic issues. Given Somalia’s particular conditions, studying this relationship within
its context is critical. Furthermore, another study by Nor, Yusof, and Warsame (2024), utilised the
Autoregressive Distributed Lag (ARDL) technique to examine the nexus between environmental
degradation and various variables, including renewable energy consumption, GDP, FDI inow,
and population. Their study provided empirical evidence on how variables like renewable energy con-
sumption and FDI inow impact environmental degradation in Somalia. However, they did not find
how FDI impacts renewable energy consumption. Thus, this study aims to fill a critical knowledge gap
by exploring the causal connection between FDI impact and renewable energy consumption in Soma-
lia using a times series data spanning 1990–2019. The study examines the long – and short-run
relationship between FDI, GDP, CO2, trade openness, and energy consumption.
Due to several critical factors, studying the causal connections between FDI and energy con-
sumption in Somalia is paramount. First, Somalia had considerable challenges in terms of energy
infrastructure and access. The nation has a limited energy infrastructure. However, there have
been recent initiatives to enhance the use of renewable energy sources. These activities seek to
solve the country’s energy demands and promote sustainable development (Nor, Yusof, and War-
same 2024). Second, one of the most crucial barriers to energy access in Somalia is the high cost of
of electricity, which is among the most expensive in the world, reaching up to one dollar per kilo-
watt-hour (World Bank 2018). This high cost substantially inuences the country’s economic
growth and development, restricting households and businesses from accessing aordable energy.
Foreign Direct Investment (FDI) can shift this situation by giving Somalia the capital, technology,
and skills required to build its renewable energy industry. Furthermore, this study aims to address a
substantial gap in the literature. While extensive studies have been conducted on the environmental
implications of energy use, little is known about how FDI may be successfully used to promote
renewable energy in a nation like Somalia, which confronts unique energy issues.
This study makes an important contribution to the literature on impact FDI on energy consup-
tion in Somalia in several ways. It focuses on Somalia, which has unique economic and political
issues, especially in the aftermath of the civil war. By addressing how FDI aects energy consump-
tion in this environment, the research addresses a vacuum in the literature since few studies have
examined the relationship between FDI and energy in unstable nations like Somalia. Additionally,
poverty in Somalia is deeply rooted and worsened by continuous war, political instability, and
environmental adversities, with nearly 70% of the population living in impoverished circumstances
(Nor and Razak 2024). The study’s results are critical for understanding how increasing FDI might
relieve energy insecurity, linked to poverty reduction and overall economic growth in Somalia. By
attracting FDI to the energy sector, especially renewable energy, Somalia may encourage sustainable
development that meets both poverty and energy demands in a post-conict environment. Finally,
the study’s results provide policy-relevant insights that are applicable not only to Somalia but also to
other developing countries facing similar challenges such as political instability and energy
INTERNATIONAL JOURNAL OF SUSTAINABLE ENERGY 3

insecurity. These findings oer a framework for policymakers to prioritise investments in renewable
energy sectors and create a conducive environment for FDI, which can drive sustainable develop-
ment and economic recovery in fragile states.
The remainder of our paper is arranged as follows. the first section provides an introduction to
the topic, followed by a review of the theoretical and empirical literature in section two. The meth-
odology is presented in section three, Section four oers the empirical findings, while sections five
and six oer a discussion of the results and conclusions of the study, respectively.
2. Literature review
2.1. Theoretical literature about FDI and energy consumption
The relationship between Foreign Direct Investment (FDI) and energy consumption can be inter-
preted from two primary theoretical approaches: Technology Diusion and the Pollution Haven
Hypothesis (PHH). The notion of technology diusion emphasises the significance of FDI as a criti-
cal way for transmitting sophisticated technologies across borders, contributing to local technical
and productivity development. Comin and Mestieri (2014) define technology diusion as the
‘dynamic consequence of adopting’ innovations across time. FDI from countries with strict
environmental regulations often provides the host country with cleaner, more energy-ecient tech-
nology, allowing local firms to adopt these practices, boosting energy eciency and lowering depen-
dency on non-renewable energy resources. This transfer may improve environmental standards in
the host economy by introducing better management practices and cleaner technology.
The Pollution Haven Hypothesis, on the other hand, argues that FDI may cause pollution-inten-
sive firms to relocate to nations with weaker environmental rules. This theory suggests that com-
panies from countries with strong environmental standards may relocate to countries with fewer
regulations, thus increasing the use of dirty energy and leading to environmental degradation
(Cole and Elliott 2005). The PHH is a counterpoint to the Environmental Kuznets Curve (EKC),
which argues that pollution levels exhibit an inverted U-curve, peaking during industrialisation
and declining as economies grow wealthier (Suri and Chapman 1998). The PHH argues that FDI
may delay the EKC’s anticipated environmental improvements as firms exploit the weakened
environmental standards in developing countries to reduce costs.
2.2. Empirical review
The transition to renewable energy is critical for addressing climate change and achieving sustain-
able development. Foreign Direct Investment is pivotal in this transition, providing necessary capi-
tal, technology transfer, and managerial expertise. This literature review examines the impact of
FDI on renewable energy consumption, considering additional factors such as GDP, environmental
degradation, and trade openness. A study done by Tan and Uprasen (2022) found that FDI aects
renewable energy use when regulatory stringency falls below a threshold level. Furthermore, when
the stringency exceeds the threshold, it promotes renewable energy usage. Similarly, Z. A. Warsame
et al. (2023) conducted a research and discovered a negative long-term association between carbon
dioxide emissions and energy consumption in Somalia. Adom and Amuakwa-Mensah (2016) found
that FDI substantially reduced energy productivity only in low-income nations. However, In the
study conducted by Tariq et al. (2023), It was found that a favourable long-term connection exists
between FDI and the consumption of renewable electricity. For Lee (2013) indicated that FDI had
played an essential role in economic development for the G20, but there is no compelling evidence
that FDI is linked with clean energy use.
Economic growth, often measured by GDP, has a complex relationship with renewable energy
consumption. Some studies suggest that rapid economic growth can lead to increased energy con-
sumption overall. The study done by A. A. Warsame (2022) indicate that urbanisation impedes
4 B. A. NOR AND I. H. MOHAMUD

energy consumption, whereas economic growth and population growth increase energy demand in
the long run. In the study conducted by Tariq et al. (2023), it was found that there exists a favour-
able long-term connection between foreign direct investment (FDI) and the consumption of renew-
able electricity. Additionally, the study revealed a positive correlation between economic growth
and renewable electricity consumption over the long term.
The relationship between environmental degradation and energy consumption is crucial for
understanding the sustainability of energy systems. Environmental degradation, driven largely by
the combustion of fossil fuels, poses significant challenges to ecosystems and human well-being.
Mohamud and Mohamud (2023) highlight that renewable energy use in Somalia has both immedi-
ate and long-term impacts on the environment. This emphasises the significance of moving to
renewable energy sources in order to reduce environmental damage over time. Karimi Alavijeh
et al. (2023) provide additional evidence of the environmental advantages of renewable energy con-
sumption, highlighting its substantial contribution to lowering CO2 emissions. This research
emphasises the potential of renewable energy as an eective means to combat climate change
and minimise environmental impact.
The study conducted by Jiang and Khan (2023) sheds light on the intricate relationship between
renewable energy consumption, trademark applications, and carbon dioxide emissions, with a par-
ticular focus on their impact on environmental quality. Their findings indicate a significant negative
correlation between renewable energy consumption and trademark applications and carbon diox-
ide emissions. This suggests that as renewable energy consumption increases and more trademarks
are registered, there is a corresponding improvement in environmental quality, indicated by a
reduction in carbon dioxide emissions.
Trade openness, which is defined by the ease of exchanging products, services, and technology
across borders, is a critical factor in the development of energy consumption patterns, particularly
in the context of renewable energy. As highlighted by Wang et al. (2023), The impact of trade open-
ness presents a contrasting dynamic, as industrialisation is found to positively inuence renewable
energy intensity, indicating a transition toward greener energy sources in industrial settings. Han
et al. (2022) reveals that trade has a significant eect on increasing non-renewable energy consump-
tion across all quintiles, implying that increased trade activities are associated with higher reliance
on fossil fuels and other non-renewable energy sources. Interestingly, the study also suggests that
while trade partially increases renewable energy consumption, this eect is not as pronounced as
with non-renewable energy sources. The study conducted by Zeren and Akkuş (2020) unveils a
notable relationship between energy consumption patterns and trade openness. Their findings indi-
cate that the reliance on non-renewable energy sources serves as a significant driver for the increase
in trade openness. This suggests that countries heavily dependent on non-renewable energy may
resort to increased trade activities to meet their energy demands, potentially importing fossil
fuels or related technologies.
3. Data and methods
3.1. Data
The 1991 civil war in Somalia and the subsequent famine are major structural breakpoints signifi-
cantly altered the trajectory of Foreign Direct Investment (FDI) and renewable energy installation
in the country. With the collapse of the central government, vital administrative and public services
disintegrated, leaving a void that the private sector quickly filled. Over 90% of electricity supply in
urban and peri-urban areas was provided by private operators through diesel generators and mini-
grids. However, the high cost of electricity in Somalia remains among the highest in the world
(World Bank 2018). As a result, traditional biomass energy sources – primarily charcoal and
firewood – became dominant, accounting for 82% of total energy consumption (African Develop-
ment Bank 2015). The civil war and its instability significantly impaired Somalia’s energy systems,
INTERNATIONAL JOURNAL OF SUSTAINABLE ENERGY 5

preventing the implementation of modern energy solutions. Despite the United Nations’ initiatives
to promote energy development and climate security, weak government institutions have impeded
progress. This uncertain environment also caused a sharp decline in FDI after 1991, with invest-
ment levels plummeting until stabilising around 1999, showing only minor uctuations until
2007. Thus, This study utilises an extensive dataset of annual time series data for Somalia, covering
the period from 1990 to 2019 and comprising 30 observations. SESRIC, the World Bank and the
Food and Agriculture Organisation (FAO) are our primary sources, lending credibility and robust-
ness to our study. We consider vital factors such as renewable energy consumption, foreign direct
investment, GDP per capita, environmental degradation and trade openness.
3.2. Model specification
To achieve the objectives of this study and examine the cointegrating properties of the scrutinised
variables, we utilise the ARDL model, introduced by Pesaran and Shin (1998). the ARDL model is a
popular econometric technique used for modelling the relationship between variables, especially
when the variables have dierent orders of integration (i.e. I(0) or I(1)) – but not I(2). The
ARDL model can handle short – and long-run dynamics between variables within the same frame-
work, making it useful for time series analysis. The benefits of the ARDL bound test over the other
traditional cointegration techniques are as follows: (i) it can be used when there is a mixed order of
integration; (ii) it allows for the estimation of both long-run and short-run coecients without
requiring pre-testing for unit roots; (iii) it is applicable for the small sample size; (iv) accommodat-
ing dierent lag length; (v) autocorrelation problem is removed. The ARDL framework is often
coupled with bounds testing, developed by Pesaran, Shin, and Smith (2001), to examine the pres-
ence of cointegration among the variables. The bounds test checks a long-run relationship (coin-
tegration) between the variables. Consequently, in addressing the structural breakpoints caused
by the 1991 civil war and famine, this study follows the model specifications outlined Poku,
Opoku, and Agyeiwaa Ennin (2022) and Nor, Yusof, and Warsame (2024).
The relationship between the dependent and explanatory variables is determined using ordinary
least squares (OLS). It is important to note that the natural log was used to adjust all research variables.
Y=f(REC,FDI,GDP,ED,TO) (1)
LRECt=
b
0+
b
1FDIt+
b
2GDPt+
b
3EDt+
b
4TOt+1(2)
LREC denotes natural log of Reenable energy consumption; FDI is the Foreign direct investment,
LGDP is natural log gross domestic product; ED is the environmental degradation and TO is the
trade openness.
3.2.1. Bounds testing procedure
Co-integration analysis can examine the relationship between two or more variables over time. To
use the F-statistics test to examine the model’s long-run relationship among variables, we rewrite
equation (3) into ARDL form.
DLRECt=
a
0+
b
1LRECt−1+
b
2FDIt−1+
b
3LGDPt−1+
b
4EDt−1+
b
5TOt−1+􏽘
q
i=0
D
a
1LRECt−k
+􏽘
p
i=0
D
a
2FDIt−k+ + 􏽘
p
i=0
D
a
3LGDPt−k+􏽘
p
i=0
D
a
4EDt−k+􏽘
p
i=0
D
a
5TOt−k+1t
(3)
To ensure the long-term relationship between the model variables, we employ the two critical values
provided by Pesaran, Shin, and Smith (2001) to reject the null hypothesis if the f-statistics obtained
6 B. A. NOR AND I. H. MOHAMUD

exceed the higher critical value. We do not reject the null hypothesis if the f-static value is less than
the lower critical values, indicating no long-term cointegration among the model variables. If this is
the case, however, the result will be inconclusive, and further testing will be required to prove that
the variables in question are co-integrated. The error correction term tests cointegration if a defini-
tive solution cannot be found.
3.2.2. Granger causality in the error correction model (ECM) frameworkS
After the cointegration relationship is validated by the Johansen and ARDL bound tests, we may
implement the Granger causality in a vector error correction modeling framework. To estimate
the error correction model, the error correction equation is expressed as follows:
DLRECt=
a
0+􏽘
q
i=0
D
b
1FDIt−k+􏽘
p
i=0
D
b
2LGDPt−k+􏽘
p
i=0
D
b
3EDt−k+􏽘
p
i=0
D
b
4TOt−k
+
l
ECMt−1+1t(4)
The other variable definitions remain the same except for the error correction term (ECT). The
ECM must be negative and statistically significant to link variables in the short term.
4. Results and analysis of the estimation
The descriptive statistics presented in Table 1 indicate that the average Renewable energy consump-
tion in Somalia was 1.96. The maximum and lowest Renewable energy consumption in Somalia
were 1.98 and 1.96, respectively. For the FDI variable, we found that the highest and lowest
LEXR were 553.00 and −4,79respectively, while the mean was −119.13. In addition, GDP has an
average of 2.47, and Somalia’s highest and lowest GDPs were 2.62 and 2.34, respectively. We
also found that Environmental degradation has an average of 0.06, and the highest and the lowest
GDP deators of Somalia were 0.101 and 0.04, respectively. For trade openness, the highest and the
lowest exchange rates were 116.57 and 5.63, respectively. However, the average value of URP was
4612.
Table 2 presents the results of the unit root test using the Augmented Dickey-Fuller (ADF) and
Phillips – Perron (PP) tests for the variables: LREC (Renewable energy consumption), FDI (Foreign
direct investment), LGDP (Gross domestic product), ED (Environmental degradation), and TO
(Trade openness). Augmented Dickey-Fuller (ADF) and Phillips – Perron (PP) were employed
to test the stationarity of the data. Notably, Renewable energy consumption and Environmental
degradation were found to be stationary at the level, implying that these variables exhibit stability
without the need for dierencing. Conversely, foreign direct investment (FDI), GDP, and Trade
openness become stationary at the first dierence. In the case of the PPP test, all variables are
stationary at the level except Renewable energy consumption, which is stationary at first dierence.
Consequently, the null hypothesis is accepted, acknowledging the presence of a unit root for certain
variables at the level.
The Johansen cointegration test in Table 3 evaluates the long-run relationship between the
dependent and independent variables. This method considered both the Trace and Maximum
Table 1. Descriptive statistics.
LREC FDI LGDP ED TO
Mean 1.966960 119.1339 2.478858 0.061039 46.12355
Median 1.969789 24.00000 2.462308 0.055515 29.27000
Maximum 1.981819 534.0000 2.622711 0.101037 106.5700
Minimum 1.940533 −4.790000 2.340999 0.043976 5.630000
Std. Dev. 0.010354 159.8377 0.091071 0.016603 39.51982
Observations 31 31 31 31 31
INTERNATIONAL JOURNAL OF SUSTAINABLE ENERGY 7

Eigenvalue tests. The Johansen cointegration test outputs are depicted in Table 3. the estimated
findings from the Johansen cointegration test confirm an integrated long-run relationship between
the dependent and independent variables.
Before executing the model computation, the optimal lag length to use in the cointegration
analysis is required to estimate the F-statistic value. For the latter, we employ the Akaike criterion
(AIC), the Schwarz-Bayesian criterion (SBC), and the information criterion (IC). Based on the AIC,
the analysis finds that two lag is the most eective. Therefore, Following the estimations in the
bound’s tests above in Table 4, the F-statistic (4.185682) is higher than the upper bound critical
value of 4.01, meaning we reject the null hypothesis. Thus, a cointegration exists between FDI,
GDP, environmental degradation, Trade openness, and Renewable energy consumption.
The long-run relationship between FDI, GDP, environmental degradation, trade openness and
renewable energy consumption (REC) was examined. The long-run estimates of the coecients are
demonstrated in Table 5 using the ARDL technique. The study found a strong empirical association
among the explanatory and dependent variables since they are all significant at the 1% and 5%
threshold levels. these findings indicate that, in the long run FDI has a positive and significant
relationship with Renewable energy consumption at a 5% level. Specifically, a 1% increase in FDI
leads to a 0.0000115% increase in renewable energy consumption. our result suggest that foreign
investments may contribute to the development of the renewable energy sector in Somalia. the
renewable energy sector is attractive to foreign investors and likely to yield returns. This enhanced
infrastructure supported by FDI can lead to economic growth, job creation, and improved energy
security, contributing to overall development and stability.
The findings also indicate that in the long run GDP in Somalia has a positive and significant
relationship with Renewable energy consumption at a 5% level. Specifically, a 1% increase in
GDP leads to a 0.026041% increase in renewable energy consumption. This result indicates that
Table 2. Result of unit root test.
Variables
ADF PP
T-statistics prob order T-statistics prob order
LREC −3.6627 0.0102** I (0) −3.6627 0.0102** I (0)
FDI −4.4193 0.0016*** I (1) −4.4213 0.0016*** I (1)
LGDP −3.6376 0.0113** I (1) −5.1531 0.0002*** I (1)
ED −2.8739 0.0016*** I (0) −4.1267 0.0032*** I (1)
TO −2.1909 0.0309** I (1) −3.2026 0.0301** I (1)
Notes: (*) Significant at the 10%; (**) Significant at the 5%; (***) Significant at the 1%. and (no) Not Significant.
Table 3. The Johansen cointegration test.
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
No. of CE(s) Eigenvalue
Trace
Statistic
0.05
Critical Value Prob.**
None * 0.9405 139.10611 69.8188 0.0000
At most 1 * 0.6864 60.0942 47.8561 0.0024
At most 2 0.5453 27.6229 29.7970 0.0873
At most 3 0.1742 5.5539 15.4947 0.7474
At most 4 0.0068 0.1927 3.8414 0.6606
Unrestricted Cointegration Rank Test (Max-eigenvalue)
Hypothesized
No. of CE(s)
Eigenvalue Max-Eigen
Statistic
0.05
Critical Value
Prob.**
None * 0.9405 79.0118 33.8768 0.0000
At most 1 * 0.6864 32.4713 27.5843 0.0108
At most 2 * 0.5453 22.0689 21.1316 0.0368
At most 3 0.1742 5.3612 14.2646 0.6957
At most 4 0.0068 0.1927 3.8414 0.6606
*Denotes rejection of the hypothesis at the 0.05 level.
**MacKinnon-Haug-Michelis (1999) p-values.
8 B. A. NOR AND I. H. MOHAMUD

as Somalia’s gross domestic product (GDP) increases, so does the consumption of renewable
energy. This correlation suggests a link between economic growth and the demand for cleaner
and more sustainable energy sources. Higher GDP often corresponds to increased economic devel-
opment and infrastructure. Our result suggests that as Somalia’s economy grows, renewable energy
consumption also increases. Economic growth can provide the necessary financial resources and
incentives to invest in renewable energy infrastructure, leading to enhanced energy security and
sustainability. This relationship highlights the potential of economic development to drive the
adoption of renewable energy, further supporting Somalia’s transition from unsustainable energy
sources like diesel and biomass to more sustainable options.
Similarly, we found a positive and significant relationship between trade openness and renewable
energy consumption in Somalia. Specifically, a 1% rise in trade openness enhances renewable
energy consumption by 0.0000280%. This suggests that as trade openness increases in Somalia,
there is a simultaneous increase in the consumption of renewable energy. This result also suggests
that increased trade openness facilitates greater renewable energy consumption, likely by allowing
the importation of renewable energy technologies and fostering an environment conducive to
investment in renewable energy. Trade openness can enhance access to advanced technologies,
reduce costs through competitive markets, and attract foreign expertise and capital. This relation-
ship underscores the importance of integrating Somalia into the global market to boost the adop-
tion of renewable energy. This implies that countries engaged in international trade may be more
inclined to adopt and use cleaner energy sources.
However, Environmental degradation has a negative and significant relationship with renewable
energy consumption in Somalia. Specifically, a 1% increase in environmental degradation leads to a
0.570376% decrease in renewable energy consumption. The negative relationship suggests that as
environmental degradation increases in Somalia, there is a simultaneous decrease in the consump-
tion of renewable energy. This implies that the country may be facing challenges in adopting cleaner
energy sources despite environmental concerns. The negative correlation indicates that environ-
mental degradation may act as a barrier to the widespread adoption of renewable energy technol-
ogies in Somalia. This could be due to various factors such as inadequate infrastructure, lack of
awareness, or economic constraints. Furthermore, this finding is particularly relevant in the context
of Somalia, which faces severe environmental challenges such as deforestation, desertification, and
soil erosion. The extensive use of firewood and charcoal, driven by the lack of access to alternative
energy sources, contributes significantly to deforestation and land degradation. These environ-
mental issues create a vicious cycle where degraded land and ecosystems further impede the
Table 4. Bound cointegration ARDL long run coefficient.
F-Bounds Test Null Hypothesis: No levels relationship
F-statistic Value Signif. I(0) I(1)
4.185682 10% 2.45 3.52
5% 2.86 4.01
2.5% 3.25 4.49
1% 3.74 5.06
Table 5. Long – Run coefficients.
Case 3: Unrestricted Constant and No Trend
Dependent variable: LREC
Selected model: ARDL (2,2,1,2,2)
Variable Coefficient Std. Error t-Statistic Prob.
FDI 1.15E-05 2.62E-06 4.398858 0.0117
LGDP 0.026041 0.007756 −3.357306 0.0284
ED −0.570376 0.014175 −40.23873 0.0000
TO 2.80E-05 6.46E-06 4.340832 0.0122
INTERNATIONAL JOURNAL OF SUSTAINABLE ENERGY 9

development and eciency of renewable energy projects, such as solar and wind farms, which rely
on stable and healthy environmental conditions.
The short-term alterations in the error correction model (ECM) are illustrated in Table 6. GDP
and Environmental degradation have a positive and statistically significant short-term association
with the renewable energy consumption. This suggests that economic growth may inuence energy
needs and environmental policies, resulting in increased investment and demand for renewable
energy sources as Somalia’s GDP increases.
However, FDI and Trade openness have a negative and significant short-term association with
the renewable energy consumption. This implies that adopting renewable energy may be slowed in
the short term due to increased foreign investments and greater openness to trade, which may
initially divert resources towards other sectors or non-renewable energy sources. Foreign invest-
ments and trade may also suggest that foreign investments and trade prioritise industries or tech-
nologies that are less concerned with sustainability, resulting in a temporary decrease in renewable
energy consumption. Negative error correction is crucial. Negative (ECM-1) signifies that any
dierence between variables from the long-run equilibrium will be fixed by 1.85 per cent for
each variable to return to it.
The diagnostic test showed that the model’s residuals are normally distributed around their
mean and have no heteroskedasticity, serial correlation, or multicollinearity. The error term is
also normally distributed, according to the Jarque-Bera normality test. The CUSUM and
CUSUMSQ tests conclude that the parameters are stable since they fall within the 95% confidence
interval. See the results in Figures 2 and 3.
5. Discussions
Somalia faces severe energy insecurity, with a significant portion of its population reliant on
firewood and charcoal for their energy needs (A. A. Warsame et al. 2022). The country remains
among the least electrified globally, Out of a population of around 15, 9 million Somalis lack access
to electricity (World Bank 2019). The primary sources of energy in Somalia include diesel genera-
tors and biomass, which are both unsustainable and environmentally detrimental. Despite ongoing
eorts by the UN to pioneer new approaches in climate security and energy to support peace and
Table 6. Estimation of Error Correction Model (ECM).
Case 3: Unrestricted Constant and No Trend
Dependent Variable: D(LREC)
Selected model: ARDL(2,2,1,2,2)
Variable Coefficient Std. Error t-Statistic Prob.
C 7.939375 1.547023 5.132033 0.0068
D(LREC(-1)) 1.761477 0.575722 3.059598 0.0377
D(LREC(-2)) 0.713275 0.299081 2.384893 0.0756
D(LREC(-3)) 0.832144 0.200242 4.155691 0.0142
D(FDI) 3.18E-05 3.45E-06 9.225972 0.0008
D(FDI(-1)) −1.15E-05 2.28E-06 −5.027764 0.0073
D(FDI(-2)) −8.25E-06 3.34E-06 −2.469485 0.0690
D(LGDP) −0.043361 0.004950 −8.759766 0.0009
D(LGDP(-1)) 0.037376 0.010434 3.582293 0.0231
D(LGDP(-2)) 0.001787 0.004064 0.439743 0.6828
D(LGDP(-3)) 0.018919 0.003810 4.965930 0.0077
D(ED) −0.592116 0.031271 −18.93503 0.0000
D(ED(-1)) 1.099209 0.326460 3.367051 0.0281
D(ED(-2)) 0.467252 0.202806 2.303935 0.0826
D(ED(-3)) 0.707239 0.133250 5.307607 0.0061
D(TO) 0.000235 3.95E-05 5.955557 0.0040
D(TO(-1)) −0.000144 2.31E-05 −6.244300 0.0034
D(TO(-2)) −5.54E-05 5.11E-05 −1.082912 0.3398
CointEq(-1)* 1.847243 0.749706 −5.131666 0.0068
10 B. A. NOR AND I. H. MOHAMUD

development, Somalia’s energy infrastructure still needs to be developed and heavily dependent on
non-renewable resources. Somalia’s energy system has been seriously disrupted by the long civil war
and subsequent instability after the fall of the central government in 1991. The United Nations has
been working hard to introduce new energy development and climate security approaches, but
weak government institutions have hindered growth. Reecting the uncertain investing environ-
ment, foreign direct investment (FDI) has dropped significantly in this scenario. After 1991, Soma-
lia’s FDI trend sharply declined; it continued until around 1999 to stabilise and showed minor
uctuations until 2007. Our study uses yearly time series data from 1990 to 2019, applying the Auto-
regressive Distributed Lag (ARDL) model to analyze the impact of FDI on renewable energy con-
sumption in Somalia. The study found a strong empirical association among the explanatory and
dependent variables since they are all significant at the 1% and 5% threshold levels. these findings
indicate that, in the long run FDI has a positive and significant relationship with Renewable energy
consumption at a 5% level. This implies that a 1% rise in average capital formation enhances econ-
omic growth by 0.0000115%. our result suggest that foreign investments may contribute to the
development of the renewable energy sector in Somalia. the renewable energy sector is attractive
to foreign investors and likely to yield returns. This enhanced infrastructure supported by FDI
can lead to economic growth, job creation, and improved energy security, contributing to overall
development and stability. Thus, our hypothesis (H1) is accepted, consistent with Tariq et al.
Figure 2. Normality test.
Figure 3. Stability test (CUSUM & CUSUMSQ).
INTERNATIONAL JOURNAL OF SUSTAINABLE ENERGY 11

(2023). To capitalise on these findings, Somalia should strengthen policies to attract FDI, encourage
public-private partnerships, invest in infrastructure and capacity building, promote research and
development, engage in regional cooperation, and conduct awareness campaigns to highlight the
benefits of renewable energy.
The findings also indicate that in the long run GDP in Somalia has a positive and significant
relationship with Renewable energy consumption at a 5% level. This implies that a 1% rise in aver-
age capital formation enhances economic growth by 0.026041%. This result indicates that as Soma-
lia’s gross domestic product (GDP) increases, so does the consumption of renewable energy. This
correlation suggests a link between economic growth and the demand for cleaner and more sustain-
able energy sources. Higher GDP often corresponds to increased economic development and infra-
structure. Our result suggests that as Somalia’s economy grows, renewable energy consumption also
increases. Economic growth can provide the necessary financial resources and incentives to invest
in renewable energy infrastructure, leading to enhanced energy security and sustainability. This
relationship highlights the potential of economic development to drive the adoption of renewable
energy, further supporting Somalia’s transition from unsustainable energy sources like diesel and
biomass to more sustainable options. Thus, our hypothesis (H2) is accepted, consistent with
A. A. Warsame et al. (2022) and Tariq et al. (2023). Therefore, fostering economic growth can
be a key strategy in promoting renewable energy consumption in Somalia.
Furthermore, the findings reveal a positive, statistically significant relationship between trade
openness and renewable energy consumption in Somalia at a 1% significance level. This implies
that a 1% rise in average capital formation enhances economic growth by 0.0000280%. This suggests
that as trade openness increases in Somalia, there is a simultaneous increase in the consumption of
renewable energy. This result also suggests that increased trade openness facilitates greater renew-
able energy consumption, likely by allowing the importation of renewable energy technologies and
fostering an environment conducive to investment in renewable energy. Trade openness can
enhance access to advanced technologies, reduce costs through competitive markets, and attract
foreign expertise and capital. This relationship underscores the importance of integrating Somalia
into the global market to boost the adoption of renewable energy. This implies that countries
engaged in international trade may be more inclined to adopt and use cleaner energy sources.
Thus, our hypothesis (H4) is accepted, consistent with Han et al. (2022). Encouraging trade open-
ness can be an eective strategy to enhance renewable energy consumption and contribute to sus-
tainable economic development in Somalia.
However, environmental degradation has a negative and significant relationship with renewable
energy consumption in Somalia at a 1% significance level. This implies that a 1% rise in average
capital formation enhances economic growth by 0.570376%. The negative relationship suggests
that as environmental degradation increases in Somalia, there is a simultaneous decrease in the con-
sumption of renewable energy. This implies that the country may be facing challenges in adopting
cleaner energy sources despite environmental concerns. This finding indicates that environmental
degradation may act as a barrier to the widespread adoption of renewable energy technologies in
Somalia. This could be due to various factors such as inadequate infrastructure, lack of awareness,
or economic constraints. Our finding is particularly relevant in the context of Somalia, which faces
severe environmental challenges such as deforestation, desertification, and soil erosion. The exten-
sive use of firewood and charcoal, driven by the lack of access to alternative energy sources, con-
tributes significantly to deforestation and land degradation. These environmental issues create a
vicious cycle where degraded land and ecosystems further impede the development and eciency
of renewable energy projects, such as solar and wind farms, which rely on stable and healthy
environmental conditions. Given the negative impact of environmental degradation on renewable
energy consumption, it is clear that improving environmental health is crucial for fostering the
adoption of renewable energy in Somalia. Eorts to combat deforestation, promote reforestation,
and implement sustainable land management practices can create a more favourable environment
for renewable energy infrastructure. Moreover, addressing environmental degradation can help
12 B. A. NOR AND I. H. MOHAMUD

mitigate the adverse eects of climate change, which also poses significant challenges to the devel-
opment and maintenance of renewable energy systems. Thus, our hypothesis (H5) is accepted and
consistent with Mohamud and Mohamud (2023). This relationship underscores the need for com-
prehensive environmental policies and initiatives in Somalia. By prioritising environmental conser-
vation and sustainable practices, Somalia can enhance its capacity to adopt and benefit from
renewable energy solutions, thereby improving energy security and contributing to sustainable
economic development.
6. Conclusion and policy recommendation
The aim of this study is to find the impact of FDI unrenewable energy consumption in Somalia. In
the long run, our findings demonstrate a positive statistically significant relationship between FDI,
Gross Domestic Product (GDP), and trade openness with renewable energy consumption. As
foreign investments increase and economic growth expands, there is a corresponding positive
impact on the adoption of renewable energy. This aligns seamlessly with the principles of sustain-
able development, where economic prosperity and international trade emerge as pivotal drivers for
the widespread adoption of cleaner and more sustainable energy sources. However, environmental
degradation has a negative and significant relationship with Renewable energy consumption in
Somalia. Nevertheless, the study also sheds light on an intricate facet of this relationship in the
short run. While GDP and environmental degradation exhibit a positive and statistically significant
short-term association with renewable energy consumption, FDI and trade openness surprisingly
show a negative and significant short-term association with the dependent variable. This under-
scores the nuanced nature of these connections over dierent time horizons.
The findings of this study have several significant policy implications for addressing renewable
energy consumption in Somalia. The study suggests policy reforms to attract sustainable FDI, pro-
mote economic development, and enhance trade openness while simultaneously addressing
environmental challenges.
Policymakers should recognise the positive relationship between Foreign Direct Investment
(FDI) and renewable energy consumption, underscoring the importance of fostering an attractive
investment environment. To achieve this, policies should focus on incentivizing FDI in the renew-
able energy sector through measures such as tax incentives, streamlined regulations, and support
for public-private partnerships. Somalia had considerable challenges in terms of energy infrastruc-
ture and access. The nation has a limited energy infrastructure. Given Somalia’s limited energy
infrastructure, the government should prioritise investments in renewable energy projects, such
as solar and wind power, to expand energy access and enhance infrastructure. these projects will
help meet the country’s energy demands and promote sustainable development. The study also rec-
ommends policy reforms to attract foreign investments, focusing on renewable energy initiatives
and green technologies. Incentivising foreign direct investment (FDI) in renewable energy will
facilitate the development of the needed infrastructure, stimulate economic growth, and promote
sustainability. Moreover, given the observed positive correlation between Gross Domestic Product
(GDP) and renewable energy consumption, policymakers should prioritise strategies that promote
economic growth while integrating renewable energy objectives. Incorporating renewable energy
targets into economic development plans can ensure sustainable growth and energy security. More-
over, utilising renewable energy to stimulate economic growth is consistent with Somalia’s long-
term development goals and aids in addressing environmental degradation. Additionally, policy-
makers should emphasise the benefits of trade openness in facilitating the importation of renewable
energy technologies and encouraging investment in the sector. Trade policies should enhance
access to renewable energy technology and resources. Somalia may expedite the adoption of renew-
able energy by establishing trade agreements that facilitate the exchange of green technology.
Finally, addressing the negative impact of environmental degradation on renewable energy con-
sumption is paramount. Policymakers must prioritise conservation eorts, including combating
INTERNATIONAL JOURNAL OF SUSTAINABLE ENERGY 13

deforestation and promoting sustainable land management practices. Integrating environmental
considerations into renewable energy policies is crucial for ensuring the long-term sustainability
of energy initiatives. Initiatives to advance renewable energy must also address environmental
issues. Policies designed to mitigate environmental degradation will ensure that economic growth
and energy development remain sustainable over the long term.
A limitation of the study is the reliance on yearly time series data spanning from 1990 to 2019.
While this dataset provides valuable insights into long-term trends, it may not capture more recent
developments or short-term uctuations in factors inuencing renewable energy consumption in
Somalia. Future research could benefit from using more granular and up-to-date data to provide
a more nuanced understanding of the dynamics between FDI, GDP, trade openness, environmental
degradation, and renewable energy consumption in Somalia.
Disclosure statement
No potential conict of interest was reported by the author(s).
Funding
This research was fully funded by Simad University.
Data availability statement
The datasets used and/or analysed during the current study are available at these links: https://www.sesric.org/query.
php, https://www.fao.org/home/en, https://data.worldbank.org/indicator.
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