Foreign direct investment into agriculture: does it crowd-out domestic investment?

ABSTRACT

This study contributes to the debate on whether foreign direct investment crowd-in or crowd-out domestic investment by examining the short run and long run crowding effects of foreign direct investment (FDI) on domestic investment (DI) in the agricultural economy, using a cross-section of 64 countries from 1997 to 2016. In the short run, FDI has no discernible effect on DI in developing and transition economies’ agriculture. For developed economies, however, there is a crowd-out effect. Overall, is a crowding-in effect in the short run. A crowding-out effect was observed for developed countries whilst a crowding-in effect was observed for developed and economies in transition. Overall, the long-run effect is “no effect”. Improving the investment environment regarding regulatory and administrative processes as well as the absorptive capacity of the host country are recommended.

KEYWORDS:

• Agriculture
• crowd-out
• domestic investment
• foreign direct investment
• substitute

JEL CLASSIFICATION:

• E22
• F23
• O13

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See further elucidation in section 3.2.

2 Agosin and Machado (2005) proposed ${\widehat{\text{β}}}_{LT}={\displaystyle \frac{{\sum }_{j=3}^5{\widehat{\text{β}}}_j}{1-{\sum }_{j=1}^2{\widehat{\text{β}}}_j}=1}$. However, multiplying by $1-\sum _{j=1}^2{\widehat{\text{β}}}_j$ and adding $\sum _{j=1}^2{\widehat{\text{β}}}_j$ to both sides gives equation 6,7 and 8.