Home Country Effect of FDI Outflows from the BRIC Countries: Study of Domestic Investment

The recent phenomenon of rising outward foreign direct investment (OFDI) flows has raised serious policy concerns about its effects on the domestic investment and capital formation in the source countries. Does OFDI stimulate domestic investment or does it crowd it out? The concern arises because OFDI activities could shift not only some of the production activities from home to foreign destinations but also could possibly threaten the availability of scarce financial resources at home by allocating resources abroad. All this have the potential to reduce domestic investment, thus lowering the long run economic growth and employment of the home economies. The central goal of this paper is to empirically explore the evidence of the macroeconomic relationship between OFDI and levels of domestic capital formation in the BRIC economies. Our study reveals that OFDI has both short run and long run positive causality with domestic investment and thus figures out to be a significant factor affecting domestic investment in the BRIC nations. It becomes imperative, therefore, that the BRIC countries make special effort to promote their OFDI through the designing of appropriate OFDI policies that would help stimulate their domestic investment and economic growth now and in the future.