The Impact of OFDI and Institutional Quality on Domestic Capital Formation at the Disaggregated Level: Evidence for Developed and Emerging Countries

Waqar Ameer,Helian Xu,Musaad Mansoor Halwan,Kazi Sohag

doi:10.3390/su12093661

Waqar Ameer, Helian Xu + Show 2 more

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https://doi.org/10.3390/su12093661

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Journal: Sustainability	Publication Date: May 1, 2020
Citations: 7	License type: CC BY 4.0

Affiliation: Hunan University, Ural Federal University

Abstract

In this study, we investigate whether outbound foreign direct investment (OFDI) either augments or impedes domestic public and private investment, incorporating the role of institutional quality into the context of developed and emerging countries. To this end, we apply a cross-sectional-autoregressive-distributed lag (CS-ARDL) approach to analyze panel data from the period 1996–2017. Our empirical findings suggest that OFDI augments private capital formation for developed countries. Institutional quality (IQ) is found to be a driving factor that promotes private capital formation in the established economies of developed countries. However, OFDI has a negative association with the public capital formation in the established economies of developed countries, while IQ has a positive association with it. In the context of emerging economies, OFDI is found to be too insignificant to have an effect on private and public capital formation. Interestingly, IQ has a detrimental effect on both private and public capital formation in emerging economies. Our findings are robust. The empirical findings of this study imply that institutional quality should continue to be improved in developed countries, while it should surpass a certain threshold for emerging economies to promote domestic capital formation.

Highlights

Domestic capital, especially private capital formation, works as a buffer that absorbs economic shocks and facilitates the preserving of economic stability
The insignificant impact of outbound foreign direct investment (OFDI) on public capital formation in the extended models again reconfirms that the OFDI in the emerging economies is not very high due to weak public market structure and underprivileged local industry that scarce away foreign reserves
We investigated the short and the long-run impact of outbound FDI and institutional quality on the domestic private capital formation in the sample of developed and emerging economies

Summary

Introduction

Especially private capital formation, works as a buffer that absorbs economic shocks and facilitates the preserving of economic stability. Private capital is more productive and innovative than public capital formation [1]. Many empirical studies suggest that public investment is an effective tool to spur the economic growth and development process [2]. Prior literature argues that both inbound foreign direct investment (IFDI) and outbound foreign direct investment (OFDI) promote domestic capital formation by different means. IFDI stimulates domestic capital by bringing advanced technologies, management skills, and technical knowledge [3,4,5] from developed countries, while OFDI promotes domestic capital formation by linking local investors to the global chain of production [6,7,8,9]. GDP growth is higher for those countries that have a higher investment to GDP ratio [10]

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