Pandemic arbitrage in foreign direct investments: A perspective on the modes of entry

ABSTRACT

Foreign direct investments (FDI) are considered long-term and less sensitive to global shocks as they involve large amounts of capital investment that are costly to reverse. This study examines whether there was a reallocation of FDI flows from destination markets more affected by the pandemic, resulting in a pandemic arbitrage. Using bilateral FDI inflows data from January 2019 to December 2020, we show that FDI flows declined to destination markets that performed worse than source markets in COVID-19 infection rates, with the effect more evident in greenfield FDI. Our results also show that bilateral colonial ties and destination market COVID-19 policy stringency impact the pandemic arbitrage in FDI flows, especially for M&As.

KEYWORDS:

• COVID-19
• Foreign direct investment
• greenfield FDI
• mergers & acquisition
• colonial ties
• COVID-19 policy stringency

JEL CLASSIFICATION:

• F20
• F21
• F23

Disclosure statement

No potential conflict of interest was reported by the authors.