Does Sectorial Foreign Direct Investment Improve Domestic Investment: An Empirical Investigation in Developing Countries

Abstract This study investigates the impact of sectoral foreign direct investment (FDI) on domestic investment in developing countries. Specifically, the study aims at assessing the influence of primary, secondary and tertiary FDI on the host country’s domestic investment. Using a quantitative approach, it analyses data from 37 developing nations spanning 2000–2019. Secondary data were obtained from the International Trade Centre (ITC), World Development Indicators (WDI), and the World Happiness Report (WHR). The study employs Pooled Ordinary Least Squares (POLS) and System Generalized Method of Moments (System GMM) to ensure robust estimation. Results reveal that sectoral FDI significantly enhances domestic investment, with primary FDI contributing most to capital formation. Secondary FDI shows the strongest positive effect on human capital investment but negatively affects health-related investment. To attract more secondary and tertiary FDI, governments should implement moderate tax policies and provide land access, alongside industrial strategies that foster innovation, productivity, and support for SMEs and large-scale industries. These measures can amplify the developmental benefits of FDI and stimulate sustainable investment growth. Key words: Developing countries, Domestic investment, GMM, Primary FDI, Secondary FDI, Sectorial FDI, Tertiary FDI