FDI and Fixed Capital Formation Private Sector in Emerging Economies: The Case of Egypt

Emerging Economies, including Egypt, strive to increase domestic capital formation to achieve sustainable economic growth, create jobs, and achieve comprehensive development. This is accomplished by stimulating domestic savings and investment and encouraging foreign direct investment as a means of attracting new physical capital, in addition to several intangible assets such as technological capabilities, managerial skills, brands, international product marketing channels, and product design. This study examined the long-term relationship between net flows foreign direct investment and gross fixed capital formation of the private sector in Egypt during the period 1960-2024, a significant long-term relationship is evident between the dependent variable, gross fixed capital formation of the private sector in Egypt during the period under study (1960-2024), and all explanatory variables FDI, nominal exchange rate, gross domestic savings, real interest rate, Domestic credit to private sector, General government final consumption expenditure, and Claims on central government. Using EViews 12’s vector error correction (VEC), the analysis discovered a significant long-term inverse relationship between net foreign direct investment (FDI) flows and gross fixed capital formation of the private sector in Egypt during the study period. were, a 10% increase in net FDI flows resulted in a 7.2% decrease in gross fixed capital formation of the private sector in Egypt. The study also found a significant inverse relationship in the long run between the explanatory variables the nominal exchange rate, the real interest rate, and total government final consumption expenditure and the dependent variable, gross fixed capital formation in the private sector in Egypt during the study period. A 10% increase in the nominal exchange rate (currency depreciation) resulted in a 4.9% decrease in gross fixed capital formation in the private sector in Egypt, highlighting the importance of currency value stability (the Egyptian pound) for increasing private sector gross fixed capital formation in Egypt. Similarly, a 10% increase in the real interest rate led to a 7.4% decrease in private sector gross fixed capital formation in Egypt, and a 10% increase in government final consumption expenditure resulted in a 13.8 % decrease in private sector gross fixed capital formation in Egypt. Also, the study found a significant long-term positive relationship between the explanatory variables of gross domestic savings, Domestic credit to private sector, Domestic credit to private sector, and gross fixed capital formation of the private sector in Egypt during the period under study. An increase in gross domestic savings of 10% results in an increase in gross fixed capital formation of the private sector in Egypt of 0.3%. As for Domestic credit to private sector and Claims on central government, an increase of 10% leads to an increase of gross fixed capital formation of the private sector in Egypt 4.1% and 0.3%, respectively. Based on the preceding findings, the study recommends the following- First, focusing on attracting foreign direct investment (FDI) flows necessary for development, which complement, rather than displace, the private sector’s role in increasing gross fixed capital formation. Second, working to stabilize the Egyptian pound’s exchange rate, which improves expectations and encourages the private sector to engage in long-term projects that will increase gross fixed capital formation. Third, encouraging gross domestic savings while increasing credit extended to the private sector and attempting to reduce real interest rates, thereby increasing the private sector’s access to necessary capital at a reasonable cost.