The study was conducted to know the interrelationship between foreign direct investment and domestic private investment. The researcher employs a vector auto-regressive model with appropriate investigation of impulse response and variance decomposition. In addition, the researcher computes descriptive analysis. The study used time series data ranging from, 1970-2012 for econometric analysis and 1992-2012 for descriptive analysis.
The result shows that foreign direct investment crowds-out domestic private investment. In addition, foreign direct investment does not have significant effect on economic growth. Secondly, Domestic private investment complements growth trajectory. However, expansion of domestic private investment does not welcome foreign direct investment.
Table of Contents
1. Introduction
2. History and Trend of Foreign Direct Investment
3. History and Trend of Domestic Private Investment
4. Link between Foreign Direct Investment and Domestic Investment
5. Rationale to see Nexus between Foreign Direct Investment and Domestic Private Investment
6. Empirical Literatures
6.1 Does Foreign Direct Investment Crowd-in/out Domestic Private Investment?
6.1.1 Foreign Direct Investment Crowds-out Domestic Private Investment
6.1.2 Foreign Direct Investment Crowds-in Domestic Private Investment
6.1.3 The Relationship between Foreign Direct Investment and Domestic Private Investment depends on Sectorial Distribution
7. Data and Methodology
7.1 Source and Nature of Data
8. Data Analysis and Interpretation
8.1 Descriptive Analysis
8.1.1 Foreign Direct Investment and Domestic Private Investment: Trend and Interrelationship
8.1.2 Sectorial Distribution of Foreign Direct Investment and Domestic Private Investment
8.1.3 Regional Distribution of Foreign Direct Investment and Domestic Private Investment
8.2 Econometrics Analysis
8.2.1 Stationarity Tests
8.2.2 Estimation of VAR Model
8.2.2.1 Lag Length Selection Criteria
8.2.2.2 Lag Exclusion Test
8.2.3 VAR Diagnostic Test
8.2.3.1 Residual vector normality test
8.2.3.2 Model Stability Test
8.2.3.3 Residual Vector Serial Correlation LM Test
8.2.3.4 Residual Vector Heteroscedasticity Test
8.2.4 Granger Causality/Block Exogeneity Test
8.2.5 The Johansen Co-integration Test Result
8.2.5.1 Long-Run Relationship
8.2.6 Vector Error Correction Model (VECM)
8.2.6.1 Short run relationship
8.2.7 Impulse response and variance decomposition
8.2.7.1 Impulse Response
8.7.2 Variance Decomposition
9. Conclusion and policy implication
9.1 Conclusion
9.2 Policy Implications
Research Objectives and Themes
This study aims to investigate the interrelationship between foreign direct investment (FDI) and domestic private investment in Ethiopia using time series data from 1970 to 2012. It seeks to determine whether FDI complements or crowds out domestic private investment and how these dynamics impact long-term economic growth in the Ethiopian context.
- Analysis of the crowding-in or crowding-out effects of FDI on domestic private investment.
- Evaluation of the causal relationships between FDI, domestic private investment, and economic growth.
- Examination of the sectorial and regional distribution of investments within Ethiopia.
- Application of Vector Auto-Regressive (VAR) and Vector Error Correction Model (VECM) econometric techniques.
Excerpt from the Book
8.1.2 Sectorial Distribution of Foreign Direct Investment and Domestic Private Investment
To reap the positive influences from inflow of foreign direct investment on economic growth and domestic private investment: the sectorial distribution of foreign direct investment matters more. In a country where inflow of foreign direct investment are distributed to sectors that are not reached by domestic private investors, this inflow have positive impact on economic growth and it might not have crowd-out impact on domestic private investment. Contrary to this, when the inflow of foreign direct investment is distribute more unevenly and/or in sectors where domestic private investors are in-it: foreign direct investment might have negative impact on domestic private investment and economic growth. In other words, the relationship between foreign direct investment and domestic investment is likely to be complementary when investment is in an undeveloped sector of the economy (owing to technological factors or to the lack of knowledge of foreign markets).
In line with this Sun (2002), explains that if foreign direct investment enters the economy in activities, in which competing domestic firms already exist, it may well reduce domestic investments that would have undertaken by domestic producers. The problem becomes graver if the foreign investment deliberately uses predatory practices to force competitors out of business, or to retard their establishment. If the host governments lack efficient competition policy tools and skills to keep such behaviour in check, a strong foreign direct investment presence may inhibit the development of local capacities.
Summary of Chapters
1. Introduction: Presents the background of the study, highlighting the importance of investment as an engine of growth and the motivation for examining the FDI-domestic investment nexus in Ethiopia.
2. History and Trend of Foreign Direct Investment: Reviews the global emergence of FDI and its specific evolution and policy framework within the Ethiopian economy.
3. History and Trend of Domestic Private Investment: Outlines the significance of private sector capital accumulation and reviews the inconsistent trends observed in Ethiopia from 1970 to 2012.
4. Link between Foreign Direct Investment and Domestic Investment: Explores the theoretical two-way relationship, discussing how FDI can potentially crowd in or crowd out domestic firms.
5. Rationale to see Nexus between Foreign Direct Investment and Domestic Private Investment: Discusses the theoretical necessity of analyzing the nexus, specifically addressing monopolistic tendencies and technological gaps.
6. Empirical Literatures: Provides a comprehensive review of existing studies concerning the spillover effects of FDI, distinguishing between crowding-out and crowding-in phenomena.
7. Data and Methodology: Details the source and nature of the secondary data used and specifies the VAR model framework and variables employed for econometric analysis.
8. Data Analysis and Interpretation: Presents the descriptive, econometric, and diagnostic test results, including stationarity tests, VAR estimations, and causality analysis.
9. Conclusion and policy implication: Summarizes the study's findings regarding the crowding-out effect of FDI in Ethiopia and provides policy recommendations for strategic investment management.
Keywords
Foreign Direct Investment, Domestic Private Investment, Ethiopia, Economic Growth, Crowding-out, Crowding-in, Vector Auto-Regressive Model, VECM, Capital Accumulation, Sectorial Distribution, Regional Distribution, Granger Causality, Macroeconomic Policy, Investment Climate, Spillover Effects.
Frequently Asked Questions
What is the fundamental focus of this research?
The research focuses on the interrelationship between foreign direct investment and domestic private investment in Ethiopia, specifically analyzing whether FDI stimulates or hinders local investment.
What are the central themes discussed in the study?
The central themes include the nexus between FDI and domestic investment, the impact of sectorial and regional distribution of capital, and the determinants of long-term economic growth.
What is the primary research objective?
The primary objective is to empirically determine if foreign direct investment in Ethiopia crowds out or complements domestic private investment and to assess its effect on economic growth.
Which scientific methodology is employed?
The researcher employs a multivariate vector auto-regressive (VAR) model, complemented by a vector error correction model (VECM), impulse response functions, and variance decomposition.
What topics are covered in the main body?
The main body covers the historical context of FDI and domestic investment in Ethiopia, a literature review of empirical findings, data analysis, and technical econometric testing including stationarity and Granger causality.
Which keywords characterize this work?
Key terms include Foreign Direct Investment, Domestic Private Investment, Ethiopia, Crowding-out/in effects, Economic Growth, and Econometric Modeling.
Does FDI in Ethiopia generally lead to a crowding-in effect?
The empirical results of this study conclude that FDI in Ethiopia leads to a crowding-out effect on domestic private investment in both the short and long run.
Why is the regional distribution of FDI in Ethiopia significant?
The regional distribution is significant because FDI is heavily concentrated in Addis Ababa and Oromia, which exacerbates competition for local resources and limits the potential for balanced regional economic development.
What policy recommendation does the author provide regarding FDI?
The author suggests that the government should direct FDI toward sectors and regions not already served by domestic investors to ensure the creation of jobs and the transfer of modern technology without displacing local firms.
- Citar trabajo
- Tibebu Aragie (Autor), 2014, Impact Foreign Direct Investment on Domestic Private Investment in Ethiopia, Múnich, GRIN Verlag, https://www.grin.com/document/287286
