Domestic Investment and Foreign Direct Investment are complements or substitute in the Growth Process: A study of selected countries’

Abstract

The aim of the study is to examine the relationship between domestic investment and foreign direct investment (FDI) to find out whether domestic investment and foreign direct investment are substitute or complement to each other in the growth process of five selected economies of USA, China, Russia, India and Pakistan, during the period 1992 to 2019. The series used for GDP and Gross Fixed Capital Formation (GFCF) as proxy for domestic investment and FDI inflow as proxy for foreign investment are second differenced to ensure that none of the series are spurious, structural breaks are detected and controlled for, and Granger causality tests are used to determine the direction of relationships among variables.GDP has an opposite impact on domestic investment and FDI in the case of Pakistan, and an equal effect in the case of Russia, while in the USA, GDP has an equal effect on the two and in China, it has an inverse effect.One should not apply a standard approach to investment policy for FDI and domestic investment; rather, the investment policy should be specific to the complementary or substitutive dynamics of each economy.This study provides a cross-country/ cross-income group analysis that is unique from single-country studies, using a combination of structural-break adjusted regression and Granger causality testing to gain a more comprehensive understanding of the investment-growth relationship.