Institutions, foreign direct investment, and domestic investment: Crowding out or crowding in?

K. Farla*, D.P.I. de Crombrugghe, B. Verspagen

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

76 Citations (Web of Science)


Studies of the relationship between FDI and domestic investment reach contradictory findings. We argue that some of the conflicting evidence may be explained by the use of poor proxies for the theoretical concepts and questionable methodological choices. We review the paper of Morrissey and Udomkerdmonkol published in this journal in 2012. Improvements in the construction of the proxies and refinements in the estimation methodology reverse the finding of Morrissey and Udomkerdmonkol that FDI inflows crowd out domestic investment. Furthermore, there is no strong evidence that “good governance” actually encourages domestic investment.
Original languageEnglish
Pages (from-to)1-9
Number of pages9
JournalWorld Development
Publication statusPublished - 1 Dec 2016


  • investment
  • FDI
  • governance
  • technology spillovers
  • rent seeking
  • developing countries
  • GMM

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