Do Foreign Investors Crowd Out or Crowd In Domestic Investment? A Panel Analysis for OECD Countries

The studies of the relationship between foreign direct investment and domestic investments indicate that the findings are mixed and controversial. This study argues that some of the conflicting evidence may be related to the ignorance of financing structure of foreign direct investments in the host market. Foreign investment can be financed as a mixture of three components (equity capitals, reinvested earnings, and intra-company loans). Thus, crowding out or crowding in effect of foreign investments on local investments may be determined by the choice of investors to finance the foreign capital in the host country. The main objective of this study is to find out the impact of foreign investment inflows on domestic investments for 30 Organization for Economic Co-operation and Development (OECD) countries from 2006 to 2013 by employing one-step Generalized Method of Moments system. We have empirically confirmed that while total foreign direct investment inflows do not have a significant effect on overall domestic investments, intra-company loans as sub-component of total foreign direct investments, do indeed, have a positive effect on domestic capital formations.