Governance and renewable energy investment in MENA countries:How does trade matter?

Highlights: • We examine the role of governance and openness on RE investment in MENA countries. • Bad governance is harmful to renewable energy investment in the MENA region. • The governance effect seems to be conditional on trade regime. • Bad governance is less detrimental to RE investment in relatively open economies. • Openness enhances RE investment in countries with low institutional quality. -- Abstract: The Middle East and North Africa (MENA) countries have recently developed renewable energy (RE) markets. However, their rate of investment in renewable energy remains small compared to other regions in the world despite their relatively abundant endowments, particularly in wind and solar. While the literature identifies some barriers to investment in renewable energy, we assume that the investment of MENA countries could be impeded by specific governance factors. Furthermore, we consider recent literature showing that trade openness reduces the negative effects of weak governance. In this paper, we empirically investigate the link between governance, openness, and renewable energy investment in the MENA region using panel data for 15 MENA countries over the period 1996-2013. Our results prove that a higher institutional quality is associated with RE investment in MENA countries. In addition, this relationship seems to be conditional on the trade regime. Our results are robust to several measures of renewable energy investment and governance as well as to an alternative econometric set-up.