Does FDI Stimulate or Crowd Out Domestic Investment in Saudi Arabia?

Abstract

The relation between foreign direct investment (FDI) and domestic investment has been the center of debate among economists in recent years. The existing literature has so far been in disagreement about the impact of FDI on domestic investment in developing countries. Saudi Arabia has focused efforts on liberalizing and attracting foreign investment over the last two decades, but its consequential effect on economic development remains a fertile area of research. Using three distinct econometric models, this research analyzes whether FDI stimulates domestic investment in Saudi Arabia in a complementary way or exert a crowding out effect over time. The results suggest that FDI and domestic investment are cointegrated in the long run and that FDI drives out domestic investment in most cases. Since most FDI flows have been to the service sector, important policy implications are offered at the end for better harnessing of FDI benefits and minimization of negative consequences.

Keywords: FDI, Domestic Investment, Crowding out, Saudi Arabia