Foreign Direct Investment and Private Domestic Investment: Does Institutional Quality Matter?

Rossanto Dwi Handoyo, Kabiru Hannafi Ibrahim, Wahyu Wisnu Wardana, Nina Wulan Sari, Lapipi

Research output: Contribution to journalArticlepeer-review


Using a two-step system generalized method of moment (SGMM) this study explored the role of institutional quality while analyzing the links between foreign direct investment (FDI) and domestic investment (DI) in 21 Asian developing and emerging countries from 2011 to 2016. Our empirical strategy indicates that the crowds-out and crowds-in effect of FDI on domestic investment depends on the chosen dependent variable. Using domestic private investment (DPI) as the dependent variable, the study confirms the crowding-out effects of FDI on domestic investment. Conversely, utilizing the gross fixed capital formation (GFCF) findings show that the FDI crowds in the domestic investment. It is also revealed that institutional quality matters in determining such nexus. The study further recommends the need to augment the positive role of institutional quality in such a way that the crowding-out effect of the concurrent increase in FDI and institutional quality will augur well for domestic investment.

Original languageEnglish
Pages (from-to)220-237
Number of pages18
JournalIranian Economic Review
Issue number1
Publication statusPublished - Apr 2024


  • Domestic Private Investment
  • Foreign Direct Investment
  • Institutional Quality
  • Two-step System Generalized Method of Moment (SGMM)


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