Non-linear panel data analysis of financial development, R&D, economic complexity and renewable energy transition in OECD countries

Today, there is a lot of focus on using renewable energy sources to address climate change and achieve sustainable development goals. This paper investigates the non-linear relationship between financial development (FIDI), economic complexity (EC), R&D investment as a control variable on renewable energy transition. FIDI’s vital role in facilitating investment in renewable energy (RE) projects has been identified. To reduce the cost of RE projects and attract more investors. Developed financial systems facilitate RE deployment by providing access to diverse financing mechanisms, such as green bonds and project finance. This is evident in countries like Australia, where a robust financial sector has supported substantial investments in solar and wind energy projects. This research investigates the nonlinear effects of FIDI on renewable energy use. It can be acknowledged that economic complexity, which is evaluated by the diversity and complexity of a country’s export products, affects the adoption of RE technologies. Can countries with higher ECs that tend to develop more advanced industrial capabilities and know-how support the development of RE solutions? On the other hand, another factor that makes use of RE is investment in research and development. Research and innovation in clean energy technologies will drive down costs, improve productivity, and produce new developments that can make RE competitive with fossil fuels. Countries investing in RE research and development have faster adoption rates and greater market penetration. Data from OECD countries in the years 2000 to 2022 show that, at the 5% confidence level, the use of RE follows a U-shaped curve with respect to financial development (using quadratic regression analysis, both the coefficients of the linear and square terms are statistically significant. These findings confirm a U-shaped relationship between FIDI and RE). Our results suggest that the increase in economic complexity may deter, at an initial stage, the transition toward renewable energy, but it can indeed be substantially expedited through strategic R&D investments. Therefore, we recommend that policymakers should invest in infrastructure that secures diversification in the energy sector and lowers adverse complexity effects and massively increase public funding for renewable energy R&D, stimulate private–public partnerships in this regard, and establish very clear rules and regulations to maximize innovation effects in renewable energy deployment. These would be critical steps in rapidly achieving a low-carbon economy and realizing sustainable development goals.