The Effects of Public Investment on Private Investment in Developing Economies

Abstract

The literature on the impact of public investment in developing economies gives inconsistent results on whether it complements or crowds out private investment. Applying several pooled specifications of a standard investment model to a panel of developing economies for 1980 to 1997, this study finds that public investment complements private investment, and that, on average, a 10 percent increase in public investment is associated with a 2 percent increase in private investment. The results also indicate that private investment is constrained by the availability of bank credit in developing economies. The same empirical models are run on a panel of developed economies. In contrast to developing economies, public investment crowds out private investment in developed economies. The results show that in a number of important ways, private investment in developed economies is influenced by different factors than private investment in developing economies.

Private and Public Investment in Africa: A Time-Series Cross-Country Analysis

“…Some authors have agreed that private and public investments positively impact economic growth. There is not a consensus on the link between public or private investment (Erden & Holcombe, 2006). Using the case of developed economy in 1980s, (Aschauer, 1989) shows that the decreasing in public infrastructure expenditures confirms that the part of the productivity does not increase.…”

“…From Sundararajan & Thakur (1980), Ram (1993), and Erden and Holcombe (2006), the model developed by these authors is a modification of the neoclassical model that incorporates the effects of public investment and uncertainty, and specifies the dynamic structure of private investment as an error correction mechanism. According to the neoclassical model of investment, incorporating public capital into the optimization problem of a representative firm under certainty, the optimal or steady state level of the private capital stock is expressed as a function of quantity of public capital (PUI it ), output (GDP it ), and the user cost of capital (C t which can be expressed by external debt stock, domestic credit to private sector among others):…”

“…Erden & Holcombe (2005) have applied several pooled specifications of a standard investment model to a panel of developing economies for 1980 to 1997 and identify that public capital complements private capital. They also run the same empirical models on a panel of developed economies to show that public investments crowd out private investments in developed economies.…”

FDI Flows to Latin America: A Pooled and Cointegration Analysis, 1980-2014

“…However, the variable utilized in this study is not -clean‖ in the sense that it also ISSN 2162-4860 2017 includes investments undertaken by state-owned enterprises (SOEs) in key sectors of the economy such as industry, banking, mining, energy, and agriculture. If these investments are undertaken by heavily subsidized and/or inefficient SOEs , then government investment may directly (and indirectly via competition for scarce funds) -crowd out‖ both private domestic and foreign investment (see Devarajan and Zou, 1994;and Erden and Holcombe, 2005). Moreover, during the period in question, many of the countries of Latin America pursued draconian IMF-sponsored stabilization and adjustment programs that led to unprecedented across-the-board cuts in public investment in economic and social infrastructure while, at the same time, they liberalized their economies to capital flows, including FDI flows.…”

“…The credit variable (CR) is expected to have positive impact on FDI flows because, in many Latin American nations, the quantity constraint is binding in terms of financing the construction of new plant, machinery, and equipment. In other words, a greater pool of investible resources should, ceteris paribus, ease the financing constraint of both foreign and domestic investors (see Erden and Holcombe, 2005).…”