Foreign Direct Investments and Domestic Investments: A Sectoral Analysis

Abstract

The primary objective of this thesis is to comprehensively examine how foreign direct investments (FDI) affect domestic investments (DI) at the sectoral level in developed countries. The existing literature largely examines the effects of FDI on DI at the aggregate level, ignoring structural differences across sectors. However, aggregate data can mask significant interactions that stem from the internal dynamics of different sectors. Assuming that the impact of FDI on DI is homogeneous and sector-independent is unrealistic. Therefore, examining the effects of FDI on DI at the sectoral level produces more accurate and policy-relevant insights than aggregate-level analyses. As the literature largely neglects this distinction, this study is, to the best of our knowledge, the first to examine in detail the impact of FDI on DI using a dynamic panel data estimation at the sectoral level for 28 developed countries during the period 2009–2019. Three major sectors are considered: primary, manufacturing, and services. To further deepen the analysis, sub-sectors are also examined. The primary sector is divided into the agriculture and mining sectors, while the services sector is divided into the finance and insurance, information and communication, transportation and storage, and construction sectors. The econometric results show that FDI crowds out DI in all sectors and sub-sectors except the agriculture sector and the finance and insurance sector. However, crowding out effects disappear in the information and communication sector and the transportation and storage sector in the long run.