FDI (Foreign Direct Investment) is an important form of international business activity. The main purpose of FDI is to facilitate connections between foreign companies and local firms. In some countries, FDI can reach a high percentage of GDP. It is estimated that FDI has strong impacts on domestic investment in Asia and Africa.
Research conducted by Mileva Elitza and Zeljko Lovrincevic has studied the effects of FDI and domestic investment on the balance of payments in transition economies. The results of their studies indicated that FDI has a positive and complementary effect on domestic investment.
Another study conducted by Mileva Elitza and Zeljko focuses on the effect of FDI and domestic investment on the economic growth in Macedonia. It was found that domestic investment had a positive and complementary effect on economic growth. It was also found that FDI had a negative and complementary effect on the economic growth in Albania.
An article by Agosin and Mayer (8) examines the relationship between domestic investment and FDI. They modeled the effect of FDI on domestic investment using the Vector Autoregressive (VAR) model. The FDI and domestic investment models were then tested using panel data. Their findings indicated that FDI has a positive effect on domestic investment in most countries, but FDI has a neutral effect in some countries.
Agosin and Mayer (8) also assessed the impact of FDI on domestic investment in countries with different entry regulations. They used the ICOR, or incremental capital-output ratio, as a variable from the growth model of Harrod-Domar. They also included the FDI-GDP ratio, and GDP growth rate as variables.