# Foreign direct investment in Russia Analysis of crowding-out effect

Abstract: The current scholars on foreign direct investment crowd out or crowding-in effect the conclusions of the diversity, the article by a theoretical equation of the total investment, the use of 1999 to 2010 China and Russia, panel data analysis of FDI in China and Russia squeeze and crowding out of investment. The results show that, FDI to China and Russia have a crowding out domestic investment, and the degree of crowding-out effect of China with a significant degree was significantly higher than Russia, while Russia's dependence on foreign capital than China, which indicates that China's foreign more perfect than the Russian market, compared with depth.

## Keywords: foreign direct investment; crowding-out effect, crowding-in effect, Russia

I. Introduction

Foreign direct investment in one country can solve the problem of inadequate funding in recent years, many developing countries have adopted investment strategy, rather than external borrowing, absorb a large amount of foreign funds to develop their economies. With the influx of foreign capital may squeeze domestic investments the effect or the crowding-in effect, crowding-out effect will bring negative externalities; crowding-in effect will bring about positive externalities, especially China and countries in transition such as Russia, after a large number of foreign investment for the domestic economy with to a positive or negative effect on investment is worth the investment effects of concern and research paper analyzes the foreign direct investment in China and Russia have the investment effect.

## Second, the model and methods

In this paper, ManuelR.Agosin et al (2000 model built using neoclassical theory evaluation of an investment equation of foreign direct investment on domestic investment. Modeling are as follows: To assess the FDI's crowding-out effect on domestic investment, the establishment of a total investment model a country's total investment can be attributed to two categories, domestic investment, one is usually to see foreign investment as FDI:

## I = Id + If (1

Similar in the model will ignore foreign investment as FDI FDI foreign investment over the part of foreign direct investment depends not only on current FDI also depends on the lag, so the model can be written as:

## Kd, t = (1-dKd, t-1 + Id, t-1 (5

Where d is the capital depreciation rate (3 and (5 eq.

## ? Position '=? Position 2 (1-d

To (6) and (2 type into (1 eq.

## ii, t =? cut i +? Zhuo 1fi, t +? Zhuo 2fi, t-1 +? Zhuo 3fi, t-2 +? Zhuo 4ii, t-1 +? Zhuo 5ii, t-2 +? Zhuo 6gi, t- 1 +? Zhuo 7gi, t-2 +? a i, t

One ii, t the i-th country in period t domestic investment-GDP ratio, fi, t the i-th country in period t FDI-GDP ratio, gi, t the i-th country in period t country's GDP growth rate, subscript i said Russia and China. On this basis, the use of b to measure the FDI's crowding-out effect on domestic investment:
In? Zhuo j (j = 1,2 notable case? Zhuo j can measure the size of the value of foreign direct investment in the long term is to squeeze into or out of a country's domestic investment:
①? Zhuo j = 1, that is, the long, FDI / PGDP each increase of 1 percentage point, it becomes IP / GDP of 1 percentage point improvement in the investment of transnational corporations and domestic investment are parallel, there is no crowding-out effect .

②? Zhuo j> 1, the long-term FDI on domestic investments in a crowding-in effect, a unit of FDI into more than one unit of total investment, there is crowding-in effect.

③? Zhuo j <1, that is long in FDI on domestic investment had a crowding-out effect, a unit of FDI into less than one unit of total investment, that is, foreign direct investment instead of domestic investment. This When there is crowding-out effect.

In? Zhuo j ≠ 1 in the case of foreign direct investment in host countries macroeconomic externalities, if it is crowding-in effect showing that the positive externalities, if it is crowding out is showing that the negative externalities.

## Third, China's FDI's crowding-out effect on domestic investment analysis

Since reform and opening, China's foreign exchange and technology as the 'double gap' so to attract foreign direct investment rather than external borrowing policy, but also to a wealth of resources, labor-intensive foreign investment advantage and a series of 'super-national treatment' a large number of preferential policies to attract foreign direct investment in China since the .1993 level of foreign investment has been in the forefront of Asia In 2002 foreign direct investment in China more than the United States as the world. FDI on China's economy forward played a certain facilitating role, which made many economists agree, but it is undeniable that as the economy continues to develop, especially in recent years a large number of FDI into China but also brought some negative effects: ① FDI flow margins are generally higher the industry, the imbalance between investment and consumption led to China, but also exacerbated the imbalance of industrial structure. ② Because of their relative to the domestic enterprises have capital, technology advantages and benefits of ownership of assets in the market competition often out of some domestic technology innovative new businesses, which is not conducive to China's capital industry structure and economic development patterns. So in the study of foreign direct investment, FDI to the host country's investment in the end there is a crowding-out effect, crowding-in effect or neutral effect become an important issue of concern if the inflow of FDI does not increase a country's total investment, or in a country's economy growing part of the process of crowding out domestic investment, then the whole country would have a negative macroeconomic externalities present, FDI accounts for the ratio of fixed capital formation in China has reached a high level, FDI of China's capital is there is crowding-out effect also caused scholars debate.

Following the use of macro data, empirical tests of FDI on China capital formation out of crowding-in effect.
2006 Thin Media on China's foreign direct investment effects were analyzed prior to 1992 has been significant foreign direct investment to squeeze into the domestic investment, foreign direct investment after 1992 had on the crowding out domestic investment side .2008 Friends Lin, Xian Guoming to the conclusion that foreign direct investment crowd out domestic investment neutral. In this paper, data from 1999 to 2010, the empirical analysis, as shown in Table 1.

China's FDI on domestic investment (Table 1) there is crowding-out effect? ??Zhuo i = 4.3 and a significant Chi-square = 0.967. With China's continuous economic development, FDI's crowding-out effect of China's more obvious, therefore, foreign direct investment limitations gradually emerged. crowding-out effect of China's rise because:
(1FDI backward linkages reduce the level of crowding-out effect make up. Foreign capital and technology-intensive industry in China is not high, the high proportion of the general processing industry, statistics show that foreign investment in China in most of the processing trade industry, the impact technology diffusion and extension of industrial chain, so that a lower level of backward linkages, increased crowding-out effect of foreign capital in China can earn profits, while out of the domestic processing trade industry investment. and then the processing trade surplus in 2 256.6 billion, which includes U.S. and European companies, including most of the foreign-funded enterprises to obtain.

(2FDI market-oriented approach to service foreign markets in the industrial chain, foreign-funded enterprises to China as their overseas plants, will produce a good product to sell on the international market, which received only a small number of processing enterprises in China processing fees, and product design, transport storage and marketing aspects of the large profits by U.S. companies, including foreign companies, including access, making the crowding-out effect increased production in the country produced a form of pollution in the country, the negative profits in foreign investment effect.

(3 makes the investment market has improved steadily rising FDI crowding-out effect in the competitive intensity and market a high degree of industry, foreign direct investment, domestic investment will crowding increased, and foreign policy of preferential foreign direct investment will increase the crowding-out effect on domestic investment in recent years the deepening of China's market-oriented, competitive markets has improved, thus making the crowding-out effect of FDI increased .

It can be seen, China has gradually out of the path-dependent development of foreign investment, while our government has come to realize that foreign direct investment in the country's limitations, introduced in April 2010 <<further improve the utilization of foreign investment in a number of comments>> an explicit proposal to open more sectors to encourage foreign investment high-end manufacturing, high-tech industries, modern service industry, new energy and energy-saving environmental protection industry, strictly limit the 'two high' and low surplus production capacity expansion projects on .2010 was called the foreign invested enterprises in China the first year of operation of the new over the past 30 years with the 'market for technology' and to give foreign companies 'super-national treatment' era officially end. Foreign direct investment also gradually out of the 'benefits of' domestic investment and together into the fierce market competition, which is reflected in China's economic development mode shift in trend.

## Fourth, Russia's analysis of crowding-out effect of FDI on domestic

In recent years, the Russian foreign direct investment in fixed assets in the gross domestic proportion of total fixed asset investment increased year by year, from the data (the Russian Federal State Statistics, 2010) can be seen that the proportion of foreign investment in Russia gradually crowding out domestic investment ratio, while a joint venture investment proportion than in 1995 has been a substantial increase in foreign investment in 2000, 1.5% to 6.0% in 2009, the proportion of average annual growth rate reached 0.5%, from 2000 to 2005, growth is most rapid growth rate to about 1.34% can be seen rapid growth in foreign investment in Russia, but also reflects the investment environment than in the past has been largely improved.

With the increasing proportion of foreign capital, foreign capital gradually reflect the effect of diminishing marginal utility, crowding Russia's increasingly obvious. Klara and Jan (2005 and others in Russia's foreign direct investment on the domestic impact of the analysis, it considers FDI's share of investment in a high proportion of low proportion of companies than the slow pace of development, and less obvious spillover effects of foreign investment gradually revealed the limitations of this paper, the use of Russia from 1999 to 2010, the statistics on foreign direct investment on their Russia investment crowding-out effect is analyzed from the data in Table 1 can be seen crowding-out effect in Russia? Zhuo i = 1.41 show that Russia's foreign direct investment crowding-out effect exists, its value is significantly less than the 4.3 Chinese crowding-out effect value, and the crowding-out effect of China's significant level of Chi-square = 0.967> 0.893 2 also clearly marked in the Russian Chi-square = 0.893 2 This shows that the crowding-out effect was weaker than Russia while China's relative dependence on foreign capital is greater than China Its reasons are:
First, dependence on foreign capital due to higher than China's overall economic instability in Russia itself, political and social instability, poor infrastructure and market size and other factors multinational companies investing in Russia 80% of that compared with China, Russia less attractive at higher risk in international capital flows, while Russia, there are large-scale capital flight.

Second, dependence on foreign capital is higher than the Chinese higher degree by the Russian privatization, leading to low savings rate, inflation eroding savings, while domestic financial institutions and capital markets are underdeveloped, so that the problem of insufficient investment is particularly acute, it makes Russia dependent on foreign direct investment in the financing to make up their own savings and investment gap.

Third, dependence on foreign capital than China's high investment in Russia is due to the structural characteristics of the decision focused on the sectoral distribution of foreign raw materials, resources development, industry 12.6% of total foreign investment, raw material processing industries, mainly in metal forging proportion accounted for 5.5% of the sector with high barriers to entry to the industry's high barriers to entry had hindered domestic investment, increased dependence on the degree of foreign direct investment.
V. Conclusions and Implications

By The empirical analysis found that belong to China and the Russian economy during the transition period, foreign direct investment on domestic investment there is some crowding-out effect, but China's foreign investment crowding-out effect on domestic investment than Russia and more significant, Russia's dependence on foreign direct investment level is higher than China, generally speaking, the development of Russian economy depends on foreign investment, driven by China's domestic enterprises should make full use of their idle capital, the use of the Russian market to stimulate domestic economic growth, China's foreign direct investment into a virtuous cycle of foreign investment in the past. Specifically include the following:
1 in trade relations, Chinese foreign direct investment crowding-out effect become apparent, the limitations of foreign direct investment have become increasingly prominent, the domestic capital continue to accumulate, it requires its own foreign investment in China's development strategy, China and Russia are only separated by a river In the field of trade and investment has a unique advantage, has long been China's direct investment in Russia has been lagging far behind, but after 2006 direct investment in Russia has been China's rapid development, especially in 2009, China became the third Russian largest investor, the absolute amount of investment reached \$ 9.757 billion accounted for the total foreign investment in Russian domestic 11.9%, second only to Luxembourg, the largest investment of 2.4 percentage points, the Chinese investment in Russia located in Moscow, St. Petersburg and Siberia and other large cities Far East, the Chinese company is mainly engaged in import and export trade, microelectronics, telecommunications, garment processing, electrical assembly, timber processing, agriculture, food and beverage industries, China's direct investment in Russia has brought enormous benefits for our country, while promoting a neighbor of Russia economic development.

2 On the policy side, Russia than in China through empirical analysis of foreign direct investment compared to the relatively low level out, a higher degree of dependence on foreign capital, so more and more attention to Russia, China, foreign investment, especially in recent years the Russian government introduced a series of effective policy reforms, such as: two heads of state in June 2009 approved the <<Sino-Russian Investment Cooperation Plan>> with each other directly for bilateral investment facilitation policy to provide important protection, promotion and our government's active cooperation of foreign investment environment has become so benign, market risk has decreased, the effect of foreign capital in China more and more obvious, while the Russian government to vigorously promote the China-Russia foreign collaboration, January 1, 2011 Sino-Russian crude oil per year will enter the 15 million tons for a period of 20 years of China-Russia oil pipeline oil began to fulfill the contract, Russian Academy of Sciences Institute of the Far East, said the deputy director of 谢尔盖卢贾宁 for trade and investment cooperation between Russia and China have great significance, the growing Chinese investment in Russia economic growth has shown a good trend.

3 attract investment potential of Russia, Russia is the size of foreign capital will have a greater potential, based on our years of 'going out' the basic national policy of economic development, current investment in Russia in 2020 for \$ 12 billion is not to discuss their feasibility, but rather to explore how to achieve this aim, first, the current base of foreign capital in Russia was only a very small .2004 15.444 billion U.S. dollars in 2005, \$ 14.6 billion, \$ 28.7 billion in 2006, 2007 \$ 41 billion, which is Russia's great power or strength is disproportionate, because the corresponding amount of foreign capital in China is much higher than this. For example, in 2004, 2005, the amount of foreign capital in China in mid-2006 were \$ 60.6 billion, \$ 85.506 billion, 86.567 billion U.S. dollars, compared to the amount of foreign capital in Russia still a big gap.

4 The Russian economy is in the special period, a period of economic restructuring, foreign investment in the risky environment, the law also has a transition and uncertainty, which requires pre-market entry in China's enterprises to make full investment in market research work, including foreign investment, environment, political and economic situation of the overall analysis of the industry, market analysis, etc. China and Russia can be dedicated to each other to provide additional investment information services, to update the existing official website of investment promotion information for the investor to provide the latest investment information and increase understanding of each other's market, before investing in research to reduce costs and improve decision-making success rate and reduce investment risk.

## References:

1 willow, Shen Guoliang. Foreign direct investment crowd out domestic investment to squeeze into the analysis of statistical research, 2002, (3.

(2) Xian Guoming, Europe Zhibin. Squeeze on China's domestic investment and the crowding-out effect and the effect of barriers to entry - based on industry panel data re-examined. World Economy, 2008, (3.

3 Fangyou Lin, Xian Guoming. FDI on China's domestic investment to squeeze into the crowding-out effect: regional differences and the dynamic characteristics of the World Economic Research, 2008, (6.

4 thin SMG. Squeeze into or out of China's domestic investment in it? - Based on empirical analysis of panel data and test. Finance Essays, 2006, (1.

5. Agosen, MR and Mayer R. Foreign Investment in Developing countries Does it Crowd in Domestic Investment UNCTAD Discussion Paper, 2000,146. Links to free download http://eng.hi138.com

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