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

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.