Effects of Outward Foreign Direct Investment on Domestic Investment: The Cases of Brazil and China

Policymakers face a dilemma over their investment‐promotion strategies for becoming more competitive in international markets. Encouraging firms to invest abroad could reduce domestic economic activity. We investigate this issue by analysing the long‐ and short‐run relationships between outward foreign direct investment and domestic investment for Brazil and China. We use a time series approach, namely autoregressive distributed lag for the period between 1975 and 2013. Our findings indicate a crowding‐in effect of outward foreign direct investment on domestic investment for both countries.