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Does Foreign Direct Investment Crowd-Out Domestic Private Investment in Sub-Saharan Africa?

Author

Listed:
  • John Mutenyo
  • Emmanuel Asmah
  • Aquilars Kalio

    () (Makerere University)

Abstract

This study investigates the impact of FDI on domestic private investment, specifically whether FDI has positive spill-over effects (crowding-in) or negative spill-over effects (crowding-out) on domestic private investment. The study uses a flexible accelerator investment model, which was modified specifically with regard to data availability to capture some of the institutional and structural characteristics of developing countries particularly the Sub-Saharan Africa (SSA) nations and also to include FDI as one of the explanatory variables. In addition to the standard panel models (i.e. fixed effects, between effects and random effects regressions), 2SLS econometric technique was used to account for the simultaneity bias between private investment and public investment, which would otherwise lead to inconsistency of parameter estimates. The Hausman (1978) specification test was then used to check for the preferable model. The study uses data collected on 34 SSA countries over the period 1990-2003. Average values for the five sub-periods: 1990-92, 1993-95, 1996-98, 1999-2001 and 2002-03 were used in order to smooth out the effects of business cycles. The findings show that FDI crowds-out domestic private investment in the selected SSA sample. This finding seems to suggest that, although increased FDI leads to economic growth in SSA as documented by Mutenyo (2008), the effect of FDI on economic growth is derived from the overall higher induced level of investment rather than efficiency gains.

Suggested Citation

  • John Mutenyo & Emmanuel Asmah & Aquilars Kalio, 2010. "Does Foreign Direct Investment Crowd-Out Domestic Private Investment in Sub-Saharan Africa?," The African Finance Journal, Africagrowth Institute, vol. 12(1), pages 27-52.
  • Handle: RePEc:afj:journl:v:12:y:2010:i:1:p:27-52
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    Cited by:

    1. Farla, Kristine & de Crombrugghe, Denis & Verspagen, Bart, 2016. "Institutions, Foreign Direct Investment, and Domestic Investment: Crowding Out or Crowding In?," World Development, Elsevier, vol. 88(C), pages 1-9.
    2. Yılmaz Akyüz, 2015. "Foreign Direct Investment, Investment Agreements, and Economic Development: Myths and Realities," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 4(1), pages 1-47, January.
    3. Alessia A. Amighini & Margaret S. McMillan & Marco Sanfilippo, 2017. "FDI and Capital Formation in Developing Economies: New Evidence from Industry-level Data," NBER Working Papers 23049, National Bureau of Economic Research, Inc.
    4. Ahmad, Najid & Du, Liangsheng, 2017. "Effects of energy production and CO2 emissions on economic growth in Iran: ARDL approach," Energy, Elsevier, vol. 123(C), pages 521-537.

    More about this item

    Keywords

    Sub Saharan Africa; Foreign Direct Investment; Spill-Over Effects; Crowd-Out and Crowd-In Effects;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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