Foreign Direct Investment, Institutions, and Domestic Investment in Developing Countries: Is there a Crowding-Out Effect?

• Published in: Comparative economic studies Vol. 67; no. 1; pp. 221 - 261
• Main Authors: Magbondé, Kadoukpè Gildas, Thiam, Djiby Racine, Konté, Mamadou Abdoulaye
• Format: Journal Article
• Language: English
• Published: London Palgrave Macmillan UK 01.03.2025; Palgrave Macmillan
• Subjects: Crowding; Developing countries; Economics; Economics and Finance; Foreign investment; Generalized method of moments; International Economics; LDCs; Political Economy/Economic Systems; GMM estimators; Domestic investment; F30; F21; E22; O17; O16; F23; Developing countries; FDI; Institutions
• ISSN: 0888-7233; 1478-3320
• DOI: 10.1057/s41294-024-00239-9

Despite using a common database for a sample of 46 developing countries to evaluate the impact of foreign direct investment (FDI) inflows on domestic investment (DI), two recent articles on the subject (Morrissey and Udomkerdmongkol in World Dev 40(3):437–445. 10.1016/j.worlddev.2011.07.004, 2012 and Farla et al. in World Dev 88:1–9, 2016. 10.1016/j.worlddev.2014.04.008), produced conflicting results. The current paper contributes to the debate by using a larger panel database of 105 developing countries from 2002 to 2018 while controlling for financial development. We make use of the system generalized method of moments (S-GMM). Our findings do not support a crowding-in effect of FDI; instead, we found that FDI crowded out domestic investment. The findings underscore that institutions played no role in the FDI–DI nexus. Furthermore, there is no strong evidence that good institutions promoted investment in developing countries from 2002 to 2018.