The impact of crowds in or crowds out on the domestic investment

Abstract

The growth of Multinational Enterprises (MNEs) activities through Foreign Direct Investments (FDI) in developed and developing countries have largely attracted the attention of policy makers because of the expected positive impacts they may have on receiving countries. But the relationship between foreign direct investment (FDI) and domestic investment is a controversial issue in the economic literature. One of the main debates is whether FDI crowds in or crowds out domestic investment. On one hand, by creating spillover effects, FDI may lead to new or higher amounts of domestic investment where it would not be possible in the absence of FDI, thus have a “crowding in” effect. On the other hand, due to the loss of competitiveness of the domestic firms FDI carries a risk of crowding-out for domestic investment. An attempt has been made in this paper to check the process and extent of crowding-in and crowding-out impacts of FDI in Georgia. In this paper, the relationship between FDI and domestic investment in Georgia will be explored for the post 1990 period. The data used for FDI and domestic investment are inward FDI flows to the country and gross capital formation, respectively. The results of econometric analysis of the total investment model presented in this paper show the evidence of crowding out long-term effect of FDI on investment in Georgia.