“Overseas direct funding below uncertainty” by 2019

A brand new paper within the Overview of the worldwide economic system, together with Caroline Jardet and Cristina Jude (each Banque de France). From the conclusion:

FDI flows had been notably weak within the years main as much as the pandemic, whereas conventional drivers reminiscent of progress or traditionally low rates of interest ought to have supported stronger momentum. This implies that structural elements past these usually thought to drive FDI inflows, reminiscent of heightened financial uncertainty following the worldwide monetary disaster, could have discouraged FDI inflows. Whereas there’s a large physique of literature analyzing the empirical determinants of FDI, empirical evaluation of the affect of uncertainty is comparatively restricted, partly defined by the shortage of constant cross-country measures of coverage uncertainty.

On this paper, we look at the position of uncertainty in driving FDI inflows in a heterogeneous pattern of developed, rising and growing international locations over a 25-year pre-Covid interval from 1995 to 2019. Citing a push-pull framework We management each the host nation and international uncertainty. By stratifying the pattern in accordance with growth ranges, results of various power and path might be recognized between the nation teams.

We due to this fact discover that it isn’t host nation uncertainty that appears to be most necessary for FDI inflows, however fairly international uncertainty. Home and political uncertainty is normally statistically insignificant for FDI inflows. These outcomes are legitimate regardless of variations in international and host nation measurements of uncertainty.

For rising markets and solely below sure circumstances, host nation uncertainty additionally seems to have a detrimental affect on FDI flows, however to a lesser extent than international uncertainty. Home uncertainty doesn’t seem like a serious driver of FDI inflows into superior or growing economies.

We additionally spotlight a flight-to-safety phenomenon when international uncertainty is excessive or persistent, prompting international traders to divert international direct funding to superior international locations thought-about secure heavens.

Lastly, our outcomes recommend that larger monetary openness in host international locations amplifies the detrimental affect of worldwide uncertainty on FDI inflows.

The outcomes are based mostly on a panel dataset, however a key discovering is illustrated by this time sequence chart.

Figures 1: FDI inflows as a share of GDP, excluding monetary facilities, % (blue, left scale) and World World Uncertainty Index (crimson, proper scale). Supply: JJC (Determine 3), Ahir, Bloom and Furceri.

What’s actual implication? In our base specification from the paper:

Coming again to the obtained level estimates of the worldwide uncertainty affect, we are able to assess whether or not this estimate is economically excessive by contemplating a counterfactual assertion. Utilizing the group-specific level estimates, we are able to contemplate what FDI inflows would have been if the extent of worldwide uncertainty from 2015 to 2019 had been akin to that of 2014 (ie 0.18 as a substitute of 0.41). This results in the outcomes proven in Determine 4.

Details are in the caption after the picture

Overseas direct funding inflows considerably dampened by uncertainty. [

Colour figure can be viewed at wileyonlinelibrary.com

] observe: The traces present FDI inflows as a proportion of GDP as a easy common throughout teams of nations. Marker traces present the anticipated FDI inflows to superior and rising market economies from 2015 to 2019 if the worldwide uncertainty index had been akin to the extent noticed in 2014.

Our estimates suggest a big affect on FDI inflows, maybe not stunning given the massive postulated change in international uncertainty ranges. FDI inflows enhance by about 1 proportion level of GDP for rising economies and by about 1.5 proportion factors for superior economies.

Our evaluation prolonged to 2019, simply earlier than the pandemic. Here’s a image of worldwide WUI and FDI inflows/GDP since then.

Figures 2: World World Uncertainty Index (WUI) (blue, left scale) and ratio of worldwide FDI inflows to international GDP (tan, proper scale). World GDP interpolated from IMF WEO (October 2022). NBER outlined dates of US recession shaded gray. Supply: worlduncertainty.com, OECD, IMF WEO October 2022 database, NBER and personal calculations.

The rise in WUI in 2020 (not within the pattern of Jardet, Jude, Chinn (2022)) is related to a fall in FDI inflows to GDP (though, in fact, earnings additionally fell). The native peak of WUI in Q2 after the prolonged Russian invasion of Ukraine can also be related to a fall in FDI inflows.