The crowding effects of foreign direct investment on domestic investment: Evidence from Asia

This paper intends to investigate the impacts and consequences of the inflow of Foreign Direct Investment (FDI) on Domestic Investment (DI) by the occurrence of the financial crisis (before, during and after Asia financial crisis) in Asia. The data were collected from 1993 to 2001 and separated into three subperiods of 1993-1995 (Before Asia Financial Crisis), 1996-1998 (During Asia Financial Crisis) and 19992001 (After Asia Financial Crisis), consisting of 38 Asian countries. In this paper, we estimated the data using the balanced panel data of Fixed Effects (FE) and Random Effects (RE) estimators with the existence of Instrumental Variables (IV). The general empirical finding found that FDI has crowded out (negative) effect on DI for all sub-periods where sub-periods during and after the Asia financial crisis showed significant results. Thus, this study concludes that the inflow of FDI is not statistically significant and harmful for DI before the Asia financial crisis. However, the impact of FDI is significant but negatively correlated with DI for the case of during and after the Asia financial crisis. Therefore, this study reveals that different economic conditions influence the inconsistent significance or not significant impact of FDI on DI in Asian countries. Corresponding author: Nurul Azwanie Binti Budang Email address for corresponding author: nurulazwanie94.na@gmail.com First submission received: 5th May 2019 Revised submission received: 31st July 2019 Accepted: 26th August 2019