Keyword

Foreign Direct Investment, Domestic Investment, Instrumental Variables, Fixed Effect, Random Effect, Panel Regression.

Abstract

This paper intends to investigate the impacts and consequences of the inflow of Foreign Direct Investment (FDI) on Domestic Investment (DI) by the occurrence of the financial crisis (before, during and after Asia financial crisis) in Asia. The data were collected from 1993 to 2001 and separated into three sub-periods of 1993-1995 (Before Asia Financial Crisis), 1996-1998 (During Asia Financial Crisis) and 1999-2001 (After Asia Financial Crisis), consisting of 38 Asian countries. In this paper, we estimated the data using the balanced panel data of Fixed Effects (FE) and Random Effects (RE) estimators with the existence of Instrumental Variables (IV). The general empirical finding found that FDI has crowded out (negative) effect on DI for all sub-periods where sub-periods during and after the Asia financial crisis showed significant results. Thus, this study concludes that the inflow of FDI is not statistically significant and harmful for DI before the Asia financial crisis. However, the impact of FDI is significant but negatively correlated with DI for the case of during and after the Asia financial crisis. Therefore, this study reveals that different economic conditions influence the inconsistent significance or not significant impact of FDI on DI in Asian countries.


Full Text : PDF

References
  1. Agosin, M. R., & Mayer, R. (2000). Foreign investment in developing countries: Does it crowd in domestic investment? . UNCTAD Discussion Papers, 146. 
  2. Ahmed, K. T., Ghani, G. M., Mohamad, N., & Derus, A. M. (2014). Does inward FDI crowd-out domestic investment? Evidence from Uganda. Procedia Social and Behavioral Sciences 172(2015), 419 – 426 
  3. Al-Sadig, A. (2013). The effects of foreign direct investment on private domestic investment: Evidence from developing countries. Empirical Economics, 44(3), 1267–1275. 
  4. Anastasia, O. C., Omade, S. I., & Osemen, E. J. (2011). Long run relationship between private investment and monetary policy in Nigeria. Journal of Finance and Accounting, 2(6), 30-39. 
  5. Ang, J. B. (2009). Do public investment and FDI crowd in or crowd out private domestic investment in Malaysia? Applied Economics, 41(7), 913-919. 
  6. Chopra, S., & Sachdeva, S. K. (2014). Analysis of FDI inflows and outflows in India. Journal of Advanced Management Science 2(4), 326-332. 
  7. Chowdhry, B., & Goyal, A. (2000). Understanding the financial crisis in Asia. Pacific-Basin Finance Journal 8(2), 135-152. 
  8. Elhiraika, A. B. (2001). Foreign capital inflow, domestic credit and private investment in Swaziland. Eastern Africa Social Science Research Review, 17(2), 69-90. 
  9. Firebaugh, G. (1992). Growth effects of foreign and domestic investment. American Journal of Sociology, 98(1), 105-130. 
  10. Froyen, R. T. (2013). Macroeconomics theories and policies (10 ed.).
  11. Gocer, I., Mercan, M., & Peker, O. (2014). Effect of foreign direct investments on the domestic investments of developing countries: A dynamic panel data analysis. Journal of Economic and Social Studies, 4(1), 73-90. 
  12. Hymer, S. H. (1976). The international operations of national firms: A study of direct foreign investment. Massachusetts Institute of Technology, Cambridge.   
  13. Ipek, E., & Kizilgöl, Ö. A. (2015). The contribution of FDI flows to domestic investment: An econometric analysis of developing countries. Journal of Management & Economics, 22(2), 402-413. 
  14. Kamaly, A. (2014). Does FDI crowd in or out domestic investment? New evidence from emerging economies Scientific Research, 5(4), 391-400. 
  15. Kim, D. D.-K., & Seo, J.-S. (2003). Does FDI inflow crowd out domestic investment in Korea? Journal of Economic Studies, 30(6), 605-622. 
  16. Kowalski, E. (2000). Determinants of economic growth in East Asia: A linear regression model. Honors Projects, 74. 
  17. Lean, H. H., & Tan, B. W. (2011). Linkages between foreign direct investment, domestic investment and economic growth in Malaysia. Journal of Economic Cooperation and Development, 32(4), 75-96. 
  18. Lipsey, R. E. (2000). Interpreting developed countries’ foreign direct investment. NBER Working Paper 7810. 
  19. McMillan, M. S., & Harrison, A. E. (2003). Does direct foreign investment affect domestic firms credit constraints? Journal of International Economics, 61(1), 73-100. 
  20. Morrissey, O., & Udomkerdmongkol, M. (2012). Governance, private investment and foreign direct investment in developing countries. World Development, 40(3), 437-445. 
  21. Obafemi, F. N., Oburota, C. S., & Amoke, C. V. (2016). Financial deepening and domestic investment in Nigeria International Journal of Economics and Finance, 8(3), 40-54. 
  22. Olweny, T., & Chiluwe, M. (2012). The effect of monetary policy on private sector investment in Kenya. Journal of Applied Finance & Banking, 2(2), 239-287. 
  23. Pham, H. (2016). Foreign direct investment, productivity and crowding-out: Dynamic panel evidence on vietnamese firms. Paper presented at the Proceedings of Economics and Finance Conferences International Institute of Social and Economic Sciences. 
  24. Sohn, C.-H. (2014). The nature of FDI competition in East Asia: Crowding-out or crowding-in?. Center for Economic and Social Studies in Asia (CESSA) Working Paper, 2014-01. 
  25. UNCTAD. (1998). World Investment Report 1998: Trends and determinants: United Nation.
  26. Wang, M. (2010). Foreign direct investment and domestic investment in the host country: Evidence from panel study. Applied Economics, 42(29), 3711-3721.