Does Lockdown Bring Shutdown? Impact of the COVID-19 Pandemic on Foreign Direct Investment

ABSTRACT

This article investigates how the COVID-19 pandemic affected home and host countries’ FDI margins. Heckman estimation of monthly bilateral FDI data indicates the following: (1) The pandemic reduced both the FDI margins. (2) COVID-19 mortality in home countries reduced extensive FDI margin. (3) FDI was more sensitive to host countries’ pandemic situation for both OECD and emerging countries; moreover, in emerging countries, FDI was affected by its domestic pandemic control because they were typically the host countries. (4) The service sector’s FDI was severely affected by the pandemic than other sectors’ FDI.

KEYWORDS:

• COVID-19
• foreign direct investment
• extensive margin
• intensive margin
• Heckman selection model

Notes

1. FDI information is from UNCTAD Global Investment Trends Monitor.

2. Data are from Johns Hopkins University, Center for Systems Science and Engineering.

3. Brodeur et al. (2020) provide a survey on the economics of COVID-19, focusing especially on socioeconomic aspects.

4. In this article, according to the definition of Knight (1921), risk is treated as an exogenous element of the external environment (Buckley et al. 2020).

5. Countries and regions are listed in Appendix A, Table A1.

6. Cover more than 99% of the FDI flow during the period.

7. Virus carried by people moving cross countries spreads over the world. According to WHO data, we use March 2009 as the initial spreading time of H1N1 for IV and January 2020 as initial spreading time of COVID-19.

8. We lack the country-monthly level death information for H1N1, which possible can be an IV for mortality for COVID-19.

Additional information

Funding

This work was supported by the Ministry of Education of China Youth Fund Program [No. 17YJC790036 and No. 17YJC790110], by the Social Science Fund of Liaoning Province [No. L19CGJ002]; and by the Department of Education of Liaoning Province’s Youth Fund Program [No. LN2017QN017 and No. LN2019Q13].