Chasing the Sun: The Political Economy of Solar Investment in the Global South

Foreign direct investment is often cited as critical for renewable energy growth in low- and middle-income countries. 

However, despite the promise of foreign investment, countries like Colombia capable of quickly scaling up solar are still facing an energy crisis.

Why has solar installation slowed in countries with experienced foreign investors, but continues to steadily grow in countries with less experienced domestic firms?

A new working paper by Ishana Ratan uses an original dataset of solar projects to show that while large foreign investors lead to quick initial growth, countries dependent on foreign investment experience a boom-and-bust cycle. In contrast, those with more domestic investment grow at a slower but steady pace.

Using an analysis of policy adoption and interviews with over 100 firms and government officials in Malaysia, Colombia and Panama, Ratan argues that disparate outcomes stem from firm embeddedness — social and economic integration — and outside investment options. When faced with regulatory roadblocks, local firms use their political connections to lobby, whereas foreign firms invest elsewhere.

Main findings:

• Foreign investment, despite driving quick short-term growth, is insufficient to motivate long-term energy transition in middle-income countries due to the political incentives of foreign investors.
  • The gap between short-term renewable energy build-out and long-term political coalitions is critical for developing countries seeking to simultaneously decarbonize and pursue development.
• Lobbying costs are driven by a firm’s embeddedness rather than firm size, given the challenge of identifying whom to lobby and what reforms to request. 
• In renewable energy, a new sector where governance is scattered across multiple domestic institutions, firm experience with local political institutions is a key determinant of effective political participation. 
• The decentralized structure of renewable energy governance leads to a pattern of firm-level political participation that departs from common political economy explanations for regulatory reform. 
  • This is both important to shape understanding of other emerging industries, and to guide policymaking for the energy transition.

In all, the author argues that the findings can inform policy solutions to mitigate the trade-off between fast-paced development and long-term energy transition. Policies to promote collaboration and dialogue between domestic and foreign firms could reduce barriers to information sharing and increase the rate of local learning. Moreover, the need for collaborative policy is increasingly urgent, as transmission bottlenecks slow global renewable energy growth. Such a policy would both increase the pace of solar energy investment and build stronger pro-renewable energy political coalitions for a sustainable energy transition.