The Long-Run Effect of Outward Foreign Direct Investment and Macroeconomic Variables on Domestic Investment: Evidence from World Major Economies Using Panel ARDL Approach

Abstract

In this paper, we investigate relationship between outward foreign direct investment flows and domestic investment among thirteen world major economies over time period 1970-2013. From 1970-2013, had outward foreign direct investment flows along with macroeconomic control variables had significant long-term effects on domestic investment among world major economies. Following the latest dynamic techniques of panel data analysis of pooled mean group and dynamic fixed effect estimators proposed by Pesaran et al. (1999), we find strong evidence of positive impact of outward foreign direct investment flows on domestic investment. Pooled mean group estimator results show that one dollar increase in foreign direct investment outflows result in increase of Domestic investment by 0.49 dollars. Dynamic fixed effect result findings also strongly support positive impact of foreign direct investment outflows on domestic investment .i.e. (one dollar increase in foreign direct investment outflows result in increase of domestic investment by 0.87 dollars).Our result findings confirm that foreign direct investment outflows along with  macroeconomic control variables have positive and significant impact on domestic investment. Dumitrescu Hurlin Panel Causality test results show that there is pairwise causality running between the variables.

Keywords: Outward FDI; Domestic investment; Cointegration; Panel Data