Investigating the Crowding Out Effect of Foreign Direct Investment in South Asian Economies

Abstract

Foreign Investment (FDI) in developing economies affects the supply of capital affecting local investment. This international practice can either be analyzed through substitution effect (crowding-out) or complementary effect (crowding-in). The former discourages local investors due to competitive pressure while the latter impacts the demand of domestic suppliers. This study intends to explore whether FDI crowds out domestic investment or not. The study analyzed the FDI-led capital formation hypothesis considering the panel data of South Asian economies for the time span of 1991- 2021. The study has utilized the fixed effect, FMOLS and DOLS techniques to analyze the data using FDI inflows. The empirical evidence of the study affirms the crowding in effect for the selected South Asian economies, The study suggests that internationalization, financial inclusion and |macroeconomic stability are potential channels to foster domestic capital in South incl countries.