Foreign Direct Investment and World Pandemic Uncertainty Index: Do Health Pandemics Matter?

Linh Tu Ho,Christopher Gan

doi:10.3390/jrfm14030107

Abstract

This paper explores the impacts of health pandemics on foreign direct investment (FDI) using the new world pandemic uncertainty index (WPUI). We investigate the effects of pandemics, including COVID-19, on FDI based on a sample of 142 economies and sub-samples (incomes and regions) from 1996 to 2019. The two-step system Generalised Method of Moments estimation of linear dynamic panel-data model (DPDGMM) is used in this study. The estimation results are robust with the results of the two-step sequential (two-stage) estimation of linear panel-data models (SELPDM) and the two-step system Generalised Method of Moments estimation (BBGMM). The results show that health pandemics have negative impacts on FDI. Significantly, the uncertainty caused by pandemics creates adverse shocks on FDI net inflows in Asia-Pacific countries and emerging economies.

Highlights

Uncertainty from health pandemics has severely impacted economies worldwide.Garrett (2008) discusses the short-term and long-term effects of the 1918 influenza pandemic using evidence from print media in 1918 and research papers such as Brainerd and Siegler (2003) and Almond (2006)
The findings suggest that international firms’ behaviour is significantly influenced by pandemic uncertainty, which explains why there is a decline in inward foreign direct investment (FDI) flows into host countries as pandemics occur, especially in emerging economies in Asia-Pacific
The coefficients of World Pandemic Uncertainty Index (WPUI) remain negative as shown in columns (1) to (8), and statistically significant in columns (4), (5), (7), and (8) in our result shows that the uncertainty from health pandemics adversely impacts the share of FDI inflows

Summary

Introduction

Uncertainty from health pandemics has severely impacted economies worldwide. Garrett (2008) discusses the short-term and long-term effects of the 1918 influenza pandemic using evidence from print media in 1918 and research papers such as Brainerd and Siegler (2003) and Almond (2006). In 2018, Ahir et al developed the World Uncertainty Index (WUI), that measures economic and political uncertainty in general for 143 countries including advanced, emerging, and low-income economies. This paper investigates the effects of health pandemic shocks on FDI using the new WPUI index in 142 countries from 1996 to 2019. Avom et al (2020) use the WUI index to investigate the impact of economic and political uncertainty on FDI regardless of the sources of uncertainty. Evaluating the effect of pandemic uncertainty on FDI inflows separately from aggregate uncertainty will provide important policy implications to economically recover post health pandemics such as the COVID-19. The significant shocks caused by the pandemic uncertainty on FDI are found in Asia-Pacific countries and emerging economies.

Literature Review

Data and Methodology

Results and Discussions

Conclusions

Discussion