This study investigates the impact of FDI on domestic private investment,
specifically whether FDI has positive spill-over effects (crowding-in) or negative
spill-over effects (crowding-out) on domestic private investment. The study uses a
flexible accelerator investment model, which was modified specifically with regard
to data availability to capture some of the institutional and structural
characteristics of developing countries particularly the Sub-Saharan Africa (SSA)
nations and also to include FDI as one of the explanatory variables. In addition to
the standard panel models (i.e. fixed effects, between effects and random effects
regressions), 2SLS econometric technique was used to account for the
simultaneity bias between private investment and public investment, which would
otherwise lead to inconsistency of parameter estimates. The Hausman (1978)
specification test was then used to check for the preferable model.
The study uses data collected on 34 SSA countries over the period 1990-2003.
Average values for the five sub-periods: 1990-92, 1993-95, 1996-98, 1999-2001
and 2002-03 were used in order to smooth out the effects of business cycles. The
findings show that FDI crowds-out domestic private investment in the selected
SSA sample. This finding seems to suggest that, although increased FDI leads to
economic growth in SSA as documented by Mutenyo (2008), the effect of FDI on
economic growth is derived from the overall higher induced level of investment
rather than efficiency gains.