Determinants of private investment: a cross-regional empirical investigation

Abstract

This study investigates the determinants of private investment in Asia, Sub-Saharan Africa (SSA), and Latin America with panel data for the period 1975-1992. Econometric tests indicated a preference for the random effects estimation procedure over other alternatives. The results, with pooled data for all the 31 countries in the sample, confirm some results found elsewhere in the empirical literature. Namely, private investment in developing countries is stimulated by real GDP growth, increases in government investment, improvements in financial intermediation, reductions in credit to the government, and declines in world interest rates. Another interesting result relates to the important role played by educational development in stimulating private investment. Nevertheless, statistically significant adverse effects of external debt on private investment found by other studies could not be confirmed by this study. In addition, the results for the full sample of countries are by no means common across the regions. While real GDP growth stimulated private investment in Asia and Latin America, its effect was not significant in SSA. Also, while government investment stimulated private investment in SSA, it had the opposite effect in Asia and Latin America. In addition, private investment was stimulated by increases in private sector credit in Asia and SSA, but not in Latin America. Also, increases in credit to the government had significant adverse effects on private investment in SSA and Latin America. Further, the adverse effects of external shocks were statistically significant only in SSA, a result that confirms the view that the region is vulnerable to these shocks.