Research Methods in a Multinational Business Environment and Implications for Capital Formation: Application of Cross-Sectional Autoregressive Distributed Lag Methods

Abstract

We explore whether foreign direct investment outflows augment or obstruct public or private capital in developing countries by decomposing domestic capital into private and public capital. While developed countries are the primary source of foreign direct investment outflows (FDIOs), developing economies have become the primary source of FDIO over the past 30 years. We apply cross-sectional autoregressive distributed lag (CS-ARDL) methods to overcome the issue of endogeneity and cross-sectional dependency in our dataset. This study analyzes the interaction effects of foreign direct investment and institutional quality (IQ) in promoting aggregate domestic capital formation in developing countries. Our empirical results show that FDI outflows augment private capital formation and additionally, IQ also upsurges private capital formation. Conversely, as per results, FDI outflows obstruct public capital formation, and IQ crowds out public capital formation significantly while private capital crowds out FDI inflows. As per result estimations, we notice that FDIO crowds in private capital formation, thus we conclude that the private sector controls the majority of the sectors for developing countries and the role of the public sector is quite minimal. We conclude that private and public capital possess different attributes; thus clubbing them together might result in aggregation bias. Our result estimations provide several useful policy implications.