Energy Consumption, Foreign Direct Investment, and Urban Development: The Cases of Nigeria and South Africa

Abstract

This study examines the causal relationship among energy consumption, foreign direct investment (FDI), and urbanization in Nigeria and South Africa in the context of a three-variable vector autoregressive (VAR) method. Both Granger causality and impulse response functions alongside variance decomposition analysis are carried out. Utilizing dataset for the variables spanning 1980 to 2022, the unrestricted and Toda Yamamoto VAR models are estimated. Results show a unidirectional relationship between FDI and energy consumption, and a feedback effect between electricity and urbanization in Nigeria. For South Africa, causality runs from energy consumption to urbanization, urbanization to petroleum consumption and electricity consumption, natural gas consumption to urbanization. A feedback effect between FDI and urbanization was also discovered. The result also reveals that urban development induces electricity consumption. The feedback effect established between urbanization and FDI implies that rapid growth in urbanization is a significant contribution to the inflows of FDI. The causality running from energy and natural gas consumption to urbanization shows that massive use of fossil fuel and natural gas are significant contributors to the urban development in South Africa. Based on these results some policy implications and recommendations are noted.