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Aggregate and Heterogeneous Sectoral Growth Effects of Foreign Direct Investment in Egypt

Research output: Contribution to journalJournal articlepeer-review

Published
<mark>Journal publication date</mark>17/11/2020
<mark>Journal</mark>Review of Development Economics
Issue number4
Volume24
Number of pages18
Pages (from-to)1511-1528
Publication StatusPublished
Early online date2/08/20
<mark>Original language</mark>English

Abstract

This paper investigates the sectoral impacts of FDI on growth in Egypt between 1990 and 2007 based upon a unique data set. It highlights the aggregation bias inherent in many empirical studies that focus solely on the economy-wide effects of foreign investment. Aggregate inflows of FDI are shown to be detrimental to the country’s economic growth performance, possibly as a result of the ‘crowding-out’ of more productive domestic investment. Some positive sector-specific effects however, are found for investment in Manufacturing & Petroleum, which also has beneficial spillovers into other sectors. FDI in the Finance & Retail and Telecommunications & Information Technology sectors are found to generate significantly negative growth effects while those in Services and Tourism are negative but generally insignificant. These findings suggest that ‘market-seeking’ FDI in certain sectors has conspicuous ‘crowding-out’ effects, possibly owing to insufficient domestic absorptive capacity. The results of this study further demonstrate the importance of potential sectoral heterogeneity of own sector and inter-sectoral economic growth effects of FDI. It therefore highlights the critical need for policy makers to take a more disaggregated sectoral-level evaluation of the benefits of foreign investment, particularly in developing economies such as Egypt.