Research Methods in a Multinational Business Environment and Implications for Capital Formation: Application of...

Area of Science:

• Economics
• International Finance
• Development Studies

Background:

• Developing economies are increasingly significant sources of foreign direct investment outflows (FDIO).
• Traditional analyses often aggregate domestic capital, potentially masking sector-specific dynamics.
• Understanding the distinct impacts of FDIO on public versus private capital is crucial for effective policy.

Purpose of the Study:

• To investigate whether foreign direct investment outflows (FDIO) augment or obstruct public and private capital in developing countries.
• To analyze the interaction effects of FDIO and institutional quality (IQ) on domestic capital formation.
• To identify sector-specific roles of capital and policy implications.

Main Methods:

• Decomposition of domestic capital into private and public components.
• Application of cross-sectional autoregressive distributed lag (CS-ARDL) methods to address endogeneity and cross-sectional dependency.
• Empirical analysis of interaction effects between FDIO, institutional quality, and capital formation.

Main Results:

• FDIO positively impacts private capital formation, while institutional quality also enhances it.
• FDIO obstructs public capital formation, and institutional quality crowds it out.
• Private capital exhibits a crowding-out effect on FDI inflows, suggesting private sector dominance.

Conclusions:

• Private and public capital exhibit different attributes, and aggregating them can lead to bias.
• FDIO predominantly benefits private capital formation in developing countries.
• Policy interventions should consider the distinct impacts of FDIO and IQ on different capital types.