The Impact of OFDI and Institutional Quality on Domestic Capital Formation at the Disaggregated Level: Evidence for Developed and Emerging Countries

Waqar Ameer, Kazi Sohag (), Helian Xu and Musaad Mansoor Halwan
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Waqar Ameer: School of Economics and Trade, Hunan University, Yuelushan, Changsha, Hunan 410079, China
Helian Xu: School of Economics and Trade, Hunan University, Yuelushan, Changsha, Hunan 410079, China
Musaad Mansoor Halwan: School of Economics and Trade, Hunan University, Yuelushan, Changsha, Hunan 410079, China

Sustainability, 2020, vol. 12, issue 9, 1-18

Abstract: In this study, we investigate whether outbound foreign direct investment (OFDI) either augments or impedes domestic public and private investment, incorporating the role of institutional quality into the context of developed and emerging countries. To this end, we apply a cross-sectional-autoregressive-distributed lag (CS-ARDL) approach to analyze panel data from the period 1996–2017. Our empirical findings suggest that OFDI augments private capital formation for developed countries. Institutional quality (IQ) is found to be a driving factor that promotes private capital formation in the established economies of developed countries. However, OFDI has a negative association with the public capital formation in the established economies of developed countries, while IQ has a positive association with it. In the context of emerging economies, OFDI is found to be too insignificant to have an effect on private and public capital formation. Interestingly, IQ has a detrimental effect on both private and public capital formation in emerging economies. Our findings are robust. The empirical findings of this study imply that institutional quality should continue to be improved in developed countries, while it should surpass a certain threshold for emerging economies to promote domestic capital formation.

Keywords: outbound foreign direct investment; institutional quality; domestic capital formation; panel data (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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