Asymmetric impact (Crowd-in or Crowd-out) of foreign direct investment on Tanzania’s domestic investment

Abstract

This study examines the asymmetric effects of Foreign Direct Investment (FDI) on domestic investment, focusing on crowd-in and crowd-out effects. Using the Non-linear Autoregressive Distributed Lag (NARDL) model, it analyzes positive and negative FDI changes as a percentage of Gross Domestic Product (GDP). Findings reveal a rapid adjustment mechanism (-0.8981, p-value 0.000) to restore long-run equilibrium. Positive FDI shocks significantly crowd in domestic investment, with a 1% rise in FDI linked to a 1.4392% increase. Negative FDI shocks, though statistically insignificant, show a small positive effect. Short-run results indicate a negative impact of positive FDI changes (-1.3632), suggesting adjustment costs or inefficiencies. Additionally, real exchange rate appreciation reduces domestic investment (-0.0965). The study highlights FDI's dual impacts, advocating policies to maximize long-term benefits, enhance absorptive capacity, support local firms, and foster foreign-local enterprise linkages.