Public, Private and Foreign Investment Nexus in the Republic of North Macedonia: Crowding-In or Out Effect?

The levels of investments in North Macedonia have been perceived for a long time as sub-optimal, with significant capital budget bias, with regularly overestimated plans vs. outturn. The research problem elaborated is whether the structure of investments matters. Thus the objective of the article is to examine if there is a complementarity or substitutability between public and private investment, as well as the role of foreign direct investments in this nexus. Within the paper the hypothesis of existence of crowding-in or crowding-out effect of the public investment and foreign direct investment exert over private investment in North Macedonia is tested. The crowding-in and –out effect is tested with an autoregressive distributed lag bound testing. The results indicate crowding-out effect of public over private investments,with significance of the foreign direct investments variable and at the same time crowding-in effect of foreign direct investments over private domestic investments. The crowding-out effect is immediate and short run. The results imply of a need for closer examination of the fiscal policies for public investment with efforts for improved public investment performance processes. The drop in GDP associated with the pandemic mainly reflects the negative innovations to the consumption preference shock and to the permanent technology shock.