Foreign Direct Investment in the Baltic States: Does it Crowd out or Crowd in Domestic investment?

Foreign direct investments are generally considered as one of the factors with positive influence on the economic development of countries in which this investments flow. For this purpose governments of transition countries try to encourage the inflow of foreign direct investment by various measures. Foreign direct investment, with other benefits, brings also many advantages such as new technologies, manufacturing processes, know-how and others. Despite this positive feedback, the theme of foreign direct investment and its impact on the economy is being discussed at many levels. In evaluating the impact of foreign direct investment on development, however, a key question is whether foreign direct investment crowd in domestic investment, or foreign direct investment crowd out domestic investment. The aim of this paper is to examine whether foreign direct investment in the Baltic States (Estonia, Latvia and Lithuania) crowd in or crowd out the domestic investment. For this purpose we apply theoretical model of investment that incorporates foreign direct investment as an exogenous variable. Data were tested with panel regression for the period 1993 - 2009. We found out that for the time period 1993 - 2009 there was an evidence of the effect of crowding out domestic investment by foreign direct investment in the Baltic States.