Impact of Natural Disasters on Foreign Direct Investment in South and South-East Asian Countries

Abstract

Abstract: This paper examines the empirical relationship between natural disasters and FDI in 14 South and South-East Asian countries, 7 from South Asia, are Bhutan, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka and the rest 7 from South East Asian countries, these are Cambodia, Indonesia, Lao PDR, Malaysia, the Philippines, Thailand and Vietnam taking panel data from 2000-2011. The two key variables are used in the analysis, foreign direct investment is the dependent variable; the total net inflows of FDI as a percentage of GDP is taken. The second key variable indicates natural disasters, the independent variable. Fixed effects model and Heteroskedasticity-Autocorrelation-Consistent (HAC) standard error are employed to estimate lagged and immediate impact of natural disaster on FDI. The empirical results show that natural disasters have a negative and statistically significant impact on FDI with two years of lag. The results indicate that post disasters management matters for attracting FDI inflow. Post disasters recovery systems and relevant policies should be able to improve the confidence of foreign investors and attractiveness of affected areas by establishing reliable and strong infrastructures and institutions. This would guide the policymakers for better fiscal decisions, mainstreaming the economic impacts of natural disasters in long-term economic planning for attracting FDI inflows and preparedness aftermath of natural disasters. Keywords: Foreign Direct Investment; Natural disasters; Panel data; Fixed effects model; HAC standard error