Global uncertainty and capital flows: any difference between foreign direct investment and portfolio investment?

ABSTRACT

This note investigates how global uncertainty relates to extreme waves of capital flows, including foreign direct investment, portfolio investment, and other investment. We find the clear differences in the role of global uncertainty between advanced and developing economies. Global uncertainty increases the likelihood of sudden contraction of portfolio investment in both advanced and developing economies, while it increases that of foreign direct investment in only advanced economies.

KEYWORDS:

• Capital flows
• Foreign direct investment
• Portfolio investment
• global uncertainty
• advanced and developing economies

JEL CLASSIFICATION:

• F20
• F30

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplemental data

Supplemental data for the article can be accessed here

Notes

¹ Following Dell’Erba and Reinhardt (2015), we construct the inflation index to adjust the cases of hyper-inflation.

² We conduct two robustness checks. The first robustness check is to drop the periods of the Global Financial Crisis (2007Q4 through 2009Q4) from our sample, and the second is to incorporate dummies of these periods into the models. The results are generally similar to our original ones, which are shown in the online appendix (Tables A2–A5).