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

Ingham, Hilary and Read, Robert and Elkomy, Shimaa (2020) Aggregate and Heterogeneous Sectoral Growth Effects of Foreign Direct Investment in Egypt. Review of Development Economics, 24 (4). pp. 1511-1528. ISSN 1363-6669

Text (RDE_EIR_Full (1))
RDE_EIR_Full_1_.pdf - Accepted Version
Available under License Creative Commons Attribution-NonCommercial-NoDerivs.
Download (406kB)

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.