Role of foreign direct investments in agriculture, forestry and fishing in developing countries

Abstract

Abstract The primary sector is vital for growth and sustainable development in emerging countries. The combined effects of COVID-19 and geopolitical uncertainty on capital flows are likely to have profound impacts on many developing countries. In particular, decreased capital inflows into agriculture will negatively affect food security and growth. However, there remain limited literature on the role of capital inflows in this sector. In this paper, we examine the role that foreign capital inflows play in the development of the agricultural, forestry and fishing sectors in developing countries. Specifically, we use the panel vector autoregression approach that accounts for endogeneity. Using data from sixteen developing economies, we find that there exists bidirectional causality between foreign direct investments in agriculture, forestry and fishing and value added in these sectors. These bidirectional relationships reflect a cyclical effect between FDI and value added in the agriculture, forestry and fishing. The effect of FDI on value added in agriculture, forestry and fishing remains positive for up to five years in our model. This implies FDI has a medium- to long-term positive impact on value added in agriculture, forestry and fishing. The implication of this result is that countries with currently high FDI transaction costs or that have a generally less conducive investment environment can improve agriculture by eliminating these obstacles. This is because FDIs can lead to improved technologies and technical expertise, practices, management and other systems that benefit the host countries.

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