Foreign Direct Investment and Domestic Capital Dynamics
Summary
Foreign direct investment (FDI) has long been recognised as a vital driver of global capital flows, influencing domestic savings rates, investment behaviour and economic development. At its core, the dynamic between FDI and domestic capital hinges on two opposing effects. On one hand, FDI can crowd in domestic investment by transferring technology, enhancing productivity and stimulating local firms to expand. On the other, it may crowd out local capital by displacing incumbent enterprises, capturing skilled labour or monopolising key inputs. The net outcome depends on country-specific factors such as institutional quality, financial market depth and absorptive capacity. In emerging economies, abundant opportunities for technology spillover and infrastructure upgrading often amplify the positive effects of FDI, whereas in advanced economies, the focus shifts towards strategic asset seeking and high-value-added linkages. Policy frameworks that promote transparency, competition and human capital development can tip the balance towards complementarity between foreign and domestic investors, thereby reinforcing sustainable growth and resilience in national capital stocks.
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Foreign Direct Investment and Domestic Capital Dynamics publication trend
The graph below shows the total number of articles in foreign direct investment and domestic capital dynamics across all publications each year (not limited to Nature Index journals).
Technical terms
Foreign Direct Investment (FDI): cross-border investment by a resident entity with a lasting interest and significant control in an enterprise abroad.
Crowding effect: the influence of FDI on domestic investment, either by displacing local capital (crowding out) or stimulating additional domestic spending (crowding in).
Vector Error Correction Model (VECM): an econometric framework that captures both short-run dynamics and long-run equilibrium relationships among integrated variables.
Panel data: longitudinal data set combining observations across multiple entities and time periods to enhance estimation efficiency and control for unobserved heterogeneity.
References
- Investigating the crowding effect of FDI on domestic investments: Evidence from Bangladesh. Heliyon (2024).
- The effects of inward and outward FDI on domestic investment: evidence using panel data of ASEAN–8 countries. Journal of Business Economics and Management (2016).
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