AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP BETWEEN FOREIGN CAPITAL INFLOWS, RENEWABLE ENERGY ADOPTION, AND SUSTAINABLE DEVELOPMENT IN PAKISTAN

Abstract

This study investigates the interplay between foreign capital inflows, renewable energy adoption, and sustainable development in Pakistan from 1990 to 2024, utilizing an Auto regressive Distributed Lag (ARDL) model. The analysis reveals that foreign direct investment (FDI) and renewable energy consumption (REC) positively influence the Sustainable Development Index (SDI), while financial development (FD) exhibits a negative impact, suggesting potential resource allocations. Trade and GDP show statistically insignificant effects on sustainability outcomes. The ARDL bounds test confirms a long-run integration relationship among the variables, with the error correction model indicating short- and long-term adjustments. Stability tests (CUSUM and CUSUMSQ) validate the model’s robustness. Despite Pakistan’s reliance on fossil fuels (64% of power generation in 2022), renewable energy adoption remains low (4% of the energy mix), constrained by financial limitations, policy inconsistencies, and inadequate infrastructure. FDI supports green technology transfers, but its allocation to renewable energy projects is limited (9.9% of total FDI in 2021). Public-private partnerships and regional cooperation are proposed to address funding gaps, aligning Pakistan’s energy transition with global sustainability goals like the Paris Agreement.