Chapter 7 - Foreign Direct Investment, Natural Disasters, and Economic Growth of Host Countries

Abstract

Given a lack of empirical review in the area, this study examines whether and how inward foreign direct investment (FDI) stock helps to revive the host country’s economy following a natural disaster. Using a dataset of natural disasters, FDI, and economic growth across countries, our research uncovered some interesting findings. The most significant results show natural disaster seems to have a larger negative impact on the growth opportunity for low- or middle-income countries when they have more inward FDI stock. Moreover, our regression results illustrate the positive relationship between the change of inward FDI stock and fixed capital formation during a disaster, particularly in a low-income economy, a finding that could be explained by the crowding-out effect of FDIs in host country economy. Overall our study highlights the important role multinational enterprises play in helping host countries’ recovery from the impacts of a natural disaster.