IDEAS home Printed from https://ideas.repec.org/a/taf/oxdevs/v33y2005i2p149-162.html
   My bibliography  Save this article

Foreign Investment in Developing Countries: Does it Crowd in Domestic Investment?

Author

Listed:
  • Manuel Agosin
  • Roberto Machado

Abstract

This paper assesses the extent to which foreign direct investment (FDI) in developing countries crowds in or crowds out domestic investment. The core of the paper is the development of a theoretical model for investment that includes a FDI variable and its estimation and testing with panel data for the period 1971-2000 and the three decades involved. The model is run for 12 countries in each of three developing regions (Africa, Asia and Latin America). The results indicate that, in all three developing regions, FDI has, at best, left domestic investment unchanged, and that there are several sub-periods for specific regions where FDI displaces domestic investment. In particular, there seems to be crowding out of domestic investment by FDI in Latin America. If these results are in fact correct, they suggests the need for policies to make FDI more effective in enhancing domestic investment in developing countries. The conclusion is that the effects of FDI on domestic investment are by no means always favourable, that simplistic policies towards FDI are unlikely to be optimal and, foremost, that more attention needs to be paid to economic policies that foster the domestic component of total investment.

Suggested Citation

  • Manuel Agosin & Roberto Machado, 2005. "Foreign Investment in Developing Countries: Does it Crowd in Domestic Investment?," Oxford Development Studies, Taylor & Francis Journals, vol. 33(2), pages 149-162.
  • Handle: RePEc:taf:oxdevs:v:33:y:2005:i:2:p:149-162
    DOI: 10.1080/13600810500137749
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/13600810500137749
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/13600810500137749?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    2. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    3. Rama, Martin, 1990. "Empirical investment equations in developing countries," Policy Research Working Paper Series 563, The World Bank.
    4. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Johannes Fedderke & Robert Klitgaard & Kamil Akramov, 2011. "Heterogeneity Happens: How Rights Matter in Economic Development," Working Papers 220, Economic Research Southern Africa.
    2. Jan Fagerberg & Bengt-Åke Lundvall & Martin Srholec, 2018. "Global Value Chains, National Innovation Systems and Economic Development," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 30(3), pages 533-556, July.
    3. Iamsiraroj, Sasi, 2016. "The foreign direct investment–economic growth nexus," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 116-133.
    4. Philipp Harms & Pierre-Guillaume Méon, 2013. "The Growth Effects of Greenfield Investment and Mergers and Acquisitions: Econometric Investigation and Implication for MENA Countries," Working Papers 794, Economic Research Forum, revised Nov 2013.
    5. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    6. Ramesh Chandra Das & Sujata Mukherjee, 2020. "Do Spending on R&D Influence Income? An Enquiry on the World’s Leading Economies and Groups," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 11(4), pages 1295-1315, December.
    7. Kimura, Hidemi & Todo, Yasuyuki, 2010. "Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach," World Development, Elsevier, vol. 38(4), pages 482-497, April.
    8. Cristina JUDE & Grégory LEVIEUGE, 2013. "Growth Effect of FDI in Developing Economies: the Role of Institutional Quality," LEO Working Papers / DR LEO 2251, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    9. Mastromarco, Camilla & Ghosh, Sucharita, 2009. "Foreign Capital, Human Capital, and Efficiency: A Stochastic Frontier Analysis for Developing Countries," World Development, Elsevier, vol. 37(2), pages 489-502, February.
    10. Martin Bijsterbosch & Marcin Kolasa, 2010. "FDI and productivity convergence in Central and Eastern Europe: an industry-level investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(4), pages 689-712, January.
    11. Li, Hong, 2000. "Testing effects of openness in the process of China's economic growth during 1978-1995," Economics Discussion Papers 2000-1, School of Economics, Kingston University London.
    12. Manh Vu Le & Terukazu Suruga, 2005. "Foreign direct investment, public expenditure and economic growth: the empirical evidence for the period 1970-2001," Applied Economics Letters, Taylor & Francis Journals, vol. 12(1), pages 45-49.
    13. Morvillier, Florian, 2020. "Do currency undervaluations affect the impact of inflation on growth?," Economic Modelling, Elsevier, vol. 84(C), pages 275-292.
    14. Keisuke Okada & Sovannroeun Samreth, 2014. "How Does Corruption Influence the Effect of Foreign Direct Investment on Economic Growth?," Global Economic Review, Taylor & Francis Journals, vol. 43(3), pages 207-220, September.
    15. repec:kqi:journl:2018-2-1-3 is not listed on IDEAS
    16. Jochen Hartwig, 2009. "A panel Granger-causality test of endogenous vs. exogenous growth," KOF Working papers 09-231, KOF Swiss Economic Institute, ETH Zurich.
    17. Chu, Amanda M.Y. & Lv, Zhihui & Wagner, Niklas F. & Wong, Wing-Keung, 2020. "Linear and nonlinear growth determinants: The case of Mongolia and its connection to China," Emerging Markets Review, Elsevier, vol. 43(C).
    18. Lai, Mingyong & Peng, Shuijun & BAO, Qun, 2006. "Technology spillovers, absorptive capacity and economic growth," China Economic Review, Elsevier, vol. 17(3), pages 300-320.
    19. Vatthanamixay Chansomphou & Masaru Ichihashi, 2011. "Foreign aid, foreign direct investment and economic growth of Lao PDR," IDEC DP2 Series 1-2, Hiroshima University, Graduate School for International Development and Cooperation (IDEC).
    20. Bravo-Ortega, Claudio & García Marín, Álvaro, 2011. "R&D and Productivity: A Two Way Avenue?," World Development, Elsevier, vol. 39(7), pages 1090-1107, July.
    21. Philipp Harms & Pierre-Guillaume Méon, 2011. "An FDI is an FDI is an FDI? The growth effects of greenfield investment and mergers and acquisitions in developing countries," Working Papers 11.10, Swiss National Bank, Study Center Gerzensee.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:oxdevs:v:33:y:2005:i:2:p:149-162. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.tandfonline.com/CODS20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/CODS20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.