Outflow FDI and Domestic Investment: Aggregated and Disaggregated Analysis

Abstract

Recently, the Gulf Cooperation Council (GCC) member countries increased their foreign investment outflows (OFDI), underpinning domestic investment (DCF) and diversifying their economies to reduce the reliance on hydrocarbon economies and augmenting green investments. Thus, our research study examines the effects of OFDI on aggregate capital formation and the decomposing effects of capital formation in to private as well as public investment by applying the common correlation effects (CS-ARDL) panel data methodology in the GCC countries. Our empirical result findings show that OFDI do not significantly spur domestic investment in the GCC countries. However, our disaggregated analysis shows that OFDI significantly contributes to private capital formation only while its contribution to public capital formation remains inconclusive. The extensive public involvement in the economies causes a crowding-out effect, eventually impedes the economic diversification, competitiveness and green activities. Our empirical evidence provides a few policy implications.