The effect of the great recession on foreign direct investment: global empirical evidence with a gravity approach

Abstract

This article estimates the effect of the present global systemic banking crisis on foreign direct investment (FDI) using the gravity equation on a sample of 161 countries over the period 2003 to 2010. Systemic banking crises, through demand shocks and credit constraints, may impact FDI in two ways: aggregate monetary flows and individual projects count. Since gravity equations account for output variations, our research relies on the financial constraints channel. We find that the great recession, through credit constraints on home supply markets, has reduced the number of FDI projects, but not their size, forcing investors to become more selective on their international endeavours.

Keywords:

• foreign direct investment
• great recession
• systemic banking crises
• gravity equation

JEL Classification:

• F20
• F21
• F23

Notes

¹ For a review on banking crises literature see Laeven (2011).

² This impact is calculated in the form exp(–0.310)–1

³ According to the Hasuman test, we can strongly reject a random effects panel model.