The impact of foreign direct investment on domestic investment in Zimbabwe

Abstract

The primary purpose of the study was to empirically examine the impact of Foreign Direct Investment on domestic investment. p, the study investigated on whether foreign direct investment crowds in or crowds out domestic investment. This study adopted the positivism research paradigm and a descriptive correlational research design that used time series data from 1990 to 2019. The Pooled Ordinary squares multiple regression analysis was used by the research. This study employed Classical Linear Regression Model (CLRM) to ascertain the statistical relationship between FDI and domestic investment. To evaluate the appropriateness and validity of the model the study carried out some diagnostic tests namely the normality, heteroskedasticity, serial correlations and multicollinearity among the regressors. Unit Roots tests were also used in the study to test for the stationarity of the variables to avoid. The findings on the impact of FDI on Domestic Investment revealed that FDI stimulates domestic investment in a positive direction. The findings suggest that trade liberalization positively impacts on domestic investment by boosting the growth of domestic investment. On the other hand, the findings revealed that a negative relationship exist between exchange rate and domestic investment. The study also found out that inflation is negatively associated with DI and the level of political stability, also affect direct investment. The findings of the study on the relationship between FDI and domestic investment revealed that FDI crowds out on domestic investment in the long term. This was indicated by the coefficient of -0.07 which was less than 1. The study recommends that inflation rates and exchange rates need to be monitored and controlled as these have a negative effect on FDI and domestic investment. The study also recommends that the government should implement a screening strategy to filter and select the type of FDI that is more beneficial to local firms.