Does Foreign Direct Investment Crowd in or Crowd out Domestic Investment? Evidence from Panel Cointegration Analysis

Abstract

This paper investigates the crowding effects of foreign direct investment (FDI) on domestic investment (DI) in 38 Asian countries throughout 1993–2016. A first-generation panel unit root test was undertaken, and the relationship among variables in the long-term period was confirmed by the results generated by Kao-type cointegration and Westerlund-type cointegration estimators. Consequently, the fixed effect regression model suggested a significant but negative effect of FDI on the performance of DI. The long-term crowding effects equation was performed to support the regression results, and it revealed the existence of the crowd-out effect of FDI on DI. In short, FDI is significant in influence the performance of DI although the effect on local firm is unfavourable.  Thus this study concludes that FDI inflows by no means always promise a good effect. In fact, instead of helping local firms out, the inflow of FDI may endanger local firms by crowding them out of the Asian business market.