The results of the regression between agricultural FDI (dependant variable) in Egypt and deposits of economic sectors as one of the independent variables in the model point to a statically negative sign, how does this make sense? although it supposed that the more savings the more investment, or this works only on the level of local investors?.
Given that my primarily explanation in case of Egypt, that the relatively high interest rate (12.68% -one year- in average during the last decade) does not encourage investment nevertheless the increased deposits in banks.
INTEREST RATE in Egypt has been high since 2016 onward [1]. Currently, the Central Bank of Egypt fixed the interest rate at 16.75% (down from 17.75% in 2018) [2]. Inflation in 2018 was 14%.
With interest above 15%, the state may be trying to control inflation by raising interest rate. If you see that there is an increase in deposits, then the policy works. here nominal per capita GDP stands at $3,005 or about $250 per month; this may seem attract for FDI in the labor intensive sector [3]. However, throughout 2018, FDI in Egypt had been unsteady.
FDI in Egypt since 2015 had been uneven. There was a drop in FDI in 2018 compared to 2017 [5]. If interest rate is a sign of domestic health, high domestic rate does not give a positive picture to attract foreign investment. Where inflation is 14% and targeted GDP growth or 2019 is 5%, not too many foreign firms would rush to such a market. Hence, the Egyptian government is implementing reform policy. Expected FDI for 2019 is about $12 billion; for a country with total GDO of $301 billion, this expected FDI represents 3.99%. Would that make significant contribution to lift Egypt out of its slump?
NEGATIVE RELATIONSHIP BETWEEN FDI AND HIGH % DEPOSITS makes sense for the facts stated above. Higher interest rate entails poor economic condition, i.e. high inflation and expensive domestic capital (monetary contraction policy with high interest rate); this condition is not attractive for FDI. As for domestic firms, it is also not good- - - too expensive for domestic firm to borrow.
LINKS:
[1] https://countryeconomy.com/key-rates/egypt
[2] https://tradingeconomics.com/egypt/interest-rate
[3] https://en.wikipedia.org/wiki/Egypt
[4] https://www.ceicdata.com/en/indicator/egypt/foreign-direct-investment
[5] https://tradingeconomics.com/egypt/foreign-direct-investment
[6] https://dailynewsegypt.com/2018/01/20/economic-experts-view-egypts-economy-2018-cautious-optimism/
Thanks professor Loaungrath a lot for your detailed answer, attachment and links.
I agree totally with your explanation that give more confidence to mine.
Dear Aly
I do not believe it is typical for corporations to foreign direct invest in the agricultural (food production) sector of another country. That would negate any causal relationship between domestic investment (deposits) and FDI. Some literature studying the relation between domestic investment and foreign direct investment include:
Article Foreign Investment in Developing Countries: Does it Crowd in...
Article Foreign Direct investment, domestic investment, and economic...
Article Which Types of Capital Inflows Foster Developing-Country Growth?
Article FDI and Economic Growth: Evidence from Nigeria
https://www.nber.org/chapters/c7739.pdf
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1090546
Article The Linkages Between FDI and Domestic Investment: Unravellin...
https://www.sciencedirect.com/science/article/pii/S0264999310000635
Thank you professor Cox for your answer and attachments, I will read them and discuss with you later, what if there was a statistically significant negative relationship between domestic deposits and FDI, with assumption that the econometric model used is valid and works, what is the proper explanation of this in case of the agriculture sector in Egypt?
Many thanks again
There can be a significant correlation between this pair of variables without there being a cause-effect relation. Domestic deposits may be related to another variable that is negatively related to FDI, that is multicollinearity. What that other variable is needs to be figured out.
Thank you professor Cox for your answer, interest rate one-year was that variable.@Raymond A K Cox
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