Does FDI crowd-in or crowd-out domestic investment? Evidence from African Economies

Mauritius - 17 April 2018

Trade topics: Other

This paper investigates the impact of FDI on domestic capital accumulation in 20 African countries for the period 2001 to 2015.The research uses a Panel Vector Autoregressive framework which accounts for possibility of both dynamism and endogeneity issues in the FDI-Domestic investment link, while at the same time providing interesting insight on the link both in the long and short run. The results from the analysis reveal that in the long run, FDI has a positive impact on domestic investment, with a reported 1% increase in FDI contributing to a boost in domestic investment by 0.22% thus confirming a crowding in effect. The other explanatory variables were reported to have the expected sign and significance with the GDP of the country being one of the most important ingredients of domestic investment. The short run estimates overall confirm those of the long run. The smaller short run coefficients suggest that it may take some time for FDI to have its full effect on domestic investment. The lagged of the investment term is observed to be positive and significant implying that investment is of a dynamic nature. Moreover, domestic investment is reported to have a positive effect on FDI, confirming the presence of bi-causality.