a new one Paper inside International Economics Reviewco-authored with Caroline Yard with Christina Jude (both Banque de France). From the conclusion:
FDI flows were particularly weak in the years leading up to the pandemic, when traditional drivers of growth or historically low interest rates should have supported stronger momentum. This suggests that, in addition to those structural factors that normally drive FDI inflows, such as increased economic uncertainty following the global financial crisis, may have hindered FDI inflows. While a substantial body of literature exists that analyzes the empirical determinants of FDI, there is relatively little empirical analysis of the effects of uncertainty, partly because of the lack of consistent cross-country measures of policy uncertainty.
In this paper, we examine the role of uncertainty in driving FDI inflows in a heterogeneous sample of advanced, emerging market, and developing countries over the 25-year pre-pandemic period from 1995 to 2019. Relying on a push-pull framework, we control for host country and global uncertainties. Stratifying the sample by level of development allows us to discern effects of varying strength and direction between country groups.
Thus, what we find appears to be most important for FDI inflows is not host country uncertainty, but global uncertainty. Domestic economic and political uncertainty is usually statistically insignificant to FDI inflows. These results hold despite differences in global and host-country uncertainty measures.
For emerging countries, host country uncertainty also appears to negatively affect FDI flows only in some cases, but to a lesser extent than global uncertainty. Domestic uncertainty does not appear to be an important driver of FDI inflows to advanced or developing economies.
We also highlight the phenomenon of risk aversion when global uncertainty is high or persistent, leading foreign investors to direct FDI to developed countries perceived as safe havens.
Finally, our results suggest that higher financial openness in host countries exacerbates the negative impact of global uncertainty on FDI inflows.
The results are based on a panel dataset, but this time series plot illustrates a key finding.
figure 1: Inward FDI as a share of GDP, excluding financial centers, in percentages (blue, left scale) and global uncertainty index (red, right scale). resource: Jinjiang City (image 3), Ahir, Bloom and Furceri.
What is the meaning of a real world?In our benchmark specification, from Paper:
Returning to the obtained point estimate of the impact of global uncertainty, we can assess whether this estimate is economically large by considering counterfactuals. Using group-specific point estimates, we can consider what FDI inflows would have been if the level of global uncertainty from 2015 to 2019 had been comparable to 2014 (ie 0.18 instead of 0.41).This leads to the result shown in the figure 4.
Uncertainty has significantly dampened foreign direct investment inflows. [
] notes: Lines show FDI inflows as a percentage of GDP, as simple averages for country groups. The marked lines show expected FDI inflows to advanced and emerging economies from 2015 to 2019, assuming that the global uncertainty index is comparable to the level observed in 2014.
Our estimates imply a large impact on FDI inflows, which is perhaps not surprising given the wide variation in assumptions about the level of global uncertainty. FDI inflows to GDP increased by about 1 percentage point in emerging market economies and by about 1.5 percentage points in advanced economies.
Our analysis extends into 2019, just before the pandemic. Here is a picture of global WUI and FDI inflows/GDP since then.
figure 2: World Uncertainty Index (WUI) (blue, left scale) and world FDI inflows as a share of world GDP (tan, right scale). World GDP interpolated based on IMF WEO (October 2022). The NBER defines the peaks and troughs of U.S. recessions as shades of gray. resource: worlduncertainty.com, OECD, IMF WEO October 2022 DatabaseNBER and author’s calculations.
WUI’s 2020 peak (not in Jardet, Jude, Chinn (2022) sample) is associated with a decline in FDI inflows to GDP (and of course income as well). Local peaks in the WUI in the second quarter were also associated with a decline in FDI inflows following Russia’s expanded invasion of Ukraine.
