Foreign Direct Investment by Emerging Market Multinationals in Africa: Impact on Domestic Capital Formation

Abstract

Foreign direct investment (FDI) flows within developing countries are rising. This article investigates whether FDI from emerging markets  (EM) contributed to the domestic capital formation in Africa and how this compares to flows from developed countries. Fixed-effect  estimates, based on panel data drawn from African countries covering the 2001-2012 period, suggest that total FDI and FDI from  developed countries exerted favourable short-run and cumulative effects on total gross fixed capital formation (GFCF). We find that the  effect of FDI from BRICS is significantly positive at least in the short run, while the average effect of FDI from other developing and  transition economies is neutral. The indirect evidence of the crowding-in effect on private domestic investment by local enterprises is  mixed. The results point to the relevance of the quality of institutions and extractive-sector activity in host economies as mediating   factors between FDI and GFCF.