Foreign Investment In Developing Countries, Does It Crowd In Domestic Investment?
This paper assesses the extent to which foreign direct investment in developing countries crowds in or crowds out domestic investment. We develop a theoretical model of investment that includes an FDI variable and we proceed to test it with panel data for the period 1970–1996 and the two subperiods 1976–1985 and 1986–1996. The model is run for three developing regions (Africa, Asia and Latin America). One version of the model allows us to distinguish crowding in and crowding out effects for individual countries within each region. The results indicate that in Asia – but less so in Africa – there has been strong crowding in of domestic investment by FDI; by contrast, strong crowding out has been the norm in Latin America. The conclusion we reach is that the effects of FDI on domestic investment are by no means always favorable and that simplistic policies toward FDI are unlikely to be optimal.
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