Effect of foreign direct investment on domestic investment in BRICS
-
DOIhttp://dx.doi.org/10.21511/imfi.19(4).2022.21
-
Article InfoVolume 19 2022, Issue #4, pp. 260-273
- Cited by
- 296 Views
-
108 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This study investigated the effect of FDI on domestic investment in BRICS using pooled ordinary least squares (pooled OLS), fixed effects, and fully modified ordinary least squares (FMOLS). Panel data spanning from 1988 to 2020 were used in this study. Mixed results, conflicting findings and divergent views on the FDI-domestic investment nexus prompted the paper to contribute to the existing literature on the subject. The study produced results that show that domestic investment was significantly enhanced by the inflow of FDI. The positive effect of savings on domestic investment was also noted to be positively significant. Results on personal remittances-domestic investment were mixed, (1) significantly positive under the pooled OLS (models 1, 2 and 3) and FMOLS approaches (model 1) and (2) non-significantly positive under the fixed effects (models 1, 2 and 3) and FMOLS (models 2, 3). The complementarity between savings and FDI had a significant positive influence on domestic investment, whilst the positive impact of a combination of FDI and personal remittances on domestic investment was not significant. BRICS nations are therefore encouraged to implement FDI inflow enhancing measures, strategies and policies to increase individual country’s domestic investment levels.
Acknowledgment
Kunofiwa Tsaurai gratefully acknowledges the moral support from the University of South Africa.
- Keywords
-
JEL Classification (Paper profile tab)C33, E22, F21
-
References44
-
Tables5
-
Figures2
-
- Figure 1. Net FDI (% of GDP) trends for BRICS countries
- Figure 2. Gross capital formation (% of GDP) trends for BRICS
-
- Table 1. Stationarity panel tests – Individual intercept
- Table 2. Johansen-Fisher approach to co-integration
- Table 3. Fixed effects
- Table 4. FMOLS
- Table 5. Pooled OLS
-
- Aggarwal, R., Kunt, A. D., & Peria, M. S. M. (2011). Do remittances promote financial development? Journal of Development Economics, 96(2), 255-264.
- Aigheyisi, O. S. (2017). The effect of FDI on domestic investment in Nigeria: Any role for financial development and human capital? Amity Journal of Economics, 2(2), 1-20.
- Amighini, A. A., McMillan, M. S., & Sanfilippo, M. (2017). FDI and capital formation in developing economies: New evidence from industry-level data (National Bureau of Economic Research Working Paper Number 23049).
- Anaman, G. (2018). Investigating the impact of FDI on domestic investment in Sub-Saharan Africa: A case study of Kenya and South Africa (Unpublished Master’s Thesis). Eastern Illinois University.
- Ansar, A., Flyvbjerg, B., Budzier, A., & Lunn, D. (2016). Does infrastructure investment lead to economic growth or economic fragility? Evidence from China. Oxford Review of Economic Policy, 32(3), 360-390.
- Aye, G. C., & Edoja, P. E. (2017). Effect of economic growth on C02 emission in developing countries: Evidence from a dynamic panel threshold model. Cogent Economics and Finance, 5(1), 1-22.
- Bibi, S., Khan, U. A., & Bibi, A. (2012). Determinants of Investment in Pakistan. Academic Research International, 2(2), 517-524.
- Chitambara, P. (2021). FDI and domestic investment in Africa: Evidence on the role of local conditions. The Journal of Developing Areas, 55(1), 219-234.
- Dash, R.K. (2020). Impact of remittances on domestic investment: A panel study of six South Asian countries. South Asia Economic Journal, 21(1), 7-30.
- Diallo, A., Jacolin, L., & Rabaud, I. (2021). FDI and domestic private investment in Sub-Saharan African countries: Crowding in or out? (Development Policies Working Paper Number 292).
- Dutta, N., & Roy, S. (2009). The impact of financial development on domestic investment; A quantile regression approach. Indian Macroeconomics Annual, 6, 107-130.
- Feldstein, M. S., & Horioka, C. Y. (1980). Domestic saving and international capital flows. Economic Journal, 90, 314-329.
- Ha, T. S., Chu, V. T., Nguyen, M. T. T., Nguyen, D. H. T., & Nguyen, A. N. T. (2021). The impact of Greenfield investment on domestic entrepreneurship. Journal of Innovation and Entrepreneurship, 10(24), 1-16.
- Ha, V. T. C. (2021). The effects of FDI on domestic firms: The case of Vietnam (Unpublished Doctoral Thesis). University of Waikato, Hamilton, New Zealand.
- Igor, I. (2015). Impact of FDI (FDI) on domestic investment in Republic of Croatia (Munich Personal RePEc Archive Working Paper Series Number 70076).
- Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53-74.
- Ijirshar, V. U. Anjande, G. Fefa, J., & Mile, B. N. (2019). The growth-differential effects of domestic investment and FDI in Africa. CBN Journal of Applied Statistics, 10(2), 139-167.
- Kamaly, A. (2014). Does FDI crowd in or out domestic investment? New evidence from emerging economies. Modern Economy, 5(4), 391-400.
- Kargbo, S. M. (2017). FDI and economic growth in Africa. (Unpublished Doctoral Thesis). School of Economics at University of Cape Town, South Africa.
- Khatib, H. B. A., Altaleb, G. S., & Alokor, S. M. (2012). Economical determinants of domestic investment. European Scientific Journal, 8(7), 1-17.
- Kumar, N., & Pradhan, J. P. (2002). FDI, externalities and economic growth in developing countries: Some empirical explorations and implications for WTO negotiations on investment (RIS Discussion Paper No. 27/2002). New Delhi, India.
- Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.
- Loungani, P., & Razin, A. (2001). How beneficial is FDI for developing countries. Finance and Development, 38(2), 1-7.
- Lucas, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42.
- Makki, S. S., & Somwaru, A. (2006). Impact of FDI and trade on economic growth. Economic Research Service. Washington DC.
- Mamatkulov, A. (2020). Impact of FDI on domestic investment in developing countries. Bulletin of Science and Practice, 6(9), 256-266.
- Mileva, E. (2008). The impact of capital flows on domestic investment in transitional economies (European Central Bank Working Paper Series Number 871).
- Mundaca, D. (2009). Remittances, financial markets development and economic growth: The case of Latin America and the Caribbean. Review of Development Economics, 13(2), 288-303.
- Nath, H. (2005). Trade, FDI and growth: Evidence from transition economies (SHSU Economics and International Business Working Paper Number SHSU-Eco-WP05-04). Huntsville, TX: Sam Houston State University.
- Ndikumana, L., & Verick, S. (2008). The linkages between FDI and domestic investment: Unravelling the developmental impact of foreign investment in Sub-Saharan Africa (IZA discussion Paper Series Number 3296).
- Odhiambo, N. M. (2010). Is financial development a spur to poverty reduction? Kenya’s experience. Journal of Economic Studies, 37(3), 343-353.
- Nwanna, G. I. (1986). The impact of FDI on domestic capital formation in a developing country: Nigeria. Savings and Development, 10(3), 265-278.
- Osabuohien, E. S., Soogun, A. O., & Urhie, E. (2017). Examining the relative roles of domestic and FDIs in Nigeria. International Journal of Economics and Financial Issues, 7(4), 365-371.
- Onaji-Benson, T. (2015). An empirical analysis of the effects of FDI on domestic investment in Sub-Saharan Africa: Pre and Post global financial crisis. The Changing Dynamics of International Business in Africa, 15-31.
- Rashid, M. M., Jit, S. K. S., & Chung-Yee, L. (2013). Impact of FDI and domestic investment on economic growth of Malaysia. Malaysian Journal of Economic Studies, 50(1), 21-35.
- Romer, P. (1986). Increasing returns and long run economic growth. Journal of Political Economy, 94(5), 1002-1037.
- Sucubasi, B., Trenovski, B., Imeri, B., & Merdzan, G. (2021). The effects of FDI on domestic investments in Western Balkans. Globalization and its Socio-Economic Consequences, 92, 1-14.
- Szkorupova, Z. (2015). Relationship between FDI and domestic investment in selected countries of Central and Eastern Europe. Procedia Economics and Finance, 23, 1017-1022.
- Swan, T. (1956). Economic growth and capital accumulation. The Economic Record, 32(2), 334-361.
- Ullah, I., Shah, M., & Khan, F. U. (2014). Domestic investment, FDI and economic growth nexus: A case of Pakistan. Economics Research International, 24, 1-6.
- Wang, M. (2010). FDI and domestic investment in the host country: Evidence from panel study. Applied Economics, 42, 3711-3721.
- Woraewaa, A. J. (2017). Impact of FDI on domestic investment: Evidence from Sub-Saharan Africa (Unpublished Thesis). University of Lethbridge.
- Yahia, Y. E., Haiyun, L., Khan, M. A., Shah, S. S. H., & Islam, M. A. (2018). The impact of FDI on domestic investment: Evidence from Sudan. International Journal of Economics and Financial Issues, 8(6), 1-10.
- Younsi, M., Bechtini, M., & Khemili, H. (2021). The effects of foreign aid, FDI and domestic investment on economic growth in African countries: Non-linearities and complementarities, African Development Review, 33(1), 55-66.