Foreign direct investment in times of crisis

Abstract

The paper compares the current FDI recession with FDI responses to past economic crises. While the decline in outflows from developed countries has been similar in magnitude to that in previous recessions, the recovery in FDI has been much slower than in the past. Inflows to emerging markets, which remained stable during previous economic crises, have experienced an overall decline. Both patterns indicate that the global scale of the current crisis has had a different and more marked FDI response than after earlier individual country crises. Compared with other global economic downturns since the 1970s, the current FDI recession has also been greater in magnitude. (The exception to this was the large FDI plunge in the early 2000s, despite the much smaller economic crisis at the time.) To the extent past FDI patterns can provide relevant insights to the current FDI slump, this could indicate that global FDI flows may remain below 2007 levels until at least 2014. The paper concludes by recommending policymakers to not just further liberalize FDI regimes - the typical response to earlier crises - but rather to use the downturn to completely rethink their FDI policies, with an enhanced focus on promotion of "sustainable FDI"