Working Paper: NBER ID: w23049
Authors: Alessia A. Amighini; Margaret S. McMillan; Marco Sanfilippo
Abstract: We contribute to the long debated issue of whether inward foreign direct investment (FDI) can stimulate investment in developing countries by introducing a novel measure of FDI, based on industry-level data. Our results suggest a positive impact of FDI on total investment – measured as the ratio of gross fixed capital formation to GDP – but only if multinational enterprises engage in manufacturing production; the same does not hold for other business activities. Moreover, we find evidence of a more beneficial impact of foreign investors from advanced economies compared to developing ones. Our results are robust to alternative measures of FDI, as well as to instrumental variable approaches accounting for the potential endogeneity of FDI.
Keywords: Foreign Direct Investment; Capital Formation; Developing Economies; Multinational Enterprises
JEL Codes: F21; F23; F63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inward FDI (F21) | Total Investment (E22) |
| Inward FDI (MNEs in Manufacturing) (F23) | GFCF to GDP Ratio (F62) |
| Foreign Investors from Advanced Economies (F21) | Domestic Investment (F21) |
| Foreign Investors from Developing Economies (F21) | Domestic Investment (F21) |
| Inward FDI (F21) | GFCF to GDP Ratio (F62) |
| Inward FDI (MNEs) (F23) | Crowding-in effect on Domestic Investment (E22) |