Pandemics and FDI inflows: The role of infrastructures

Abstract

This study investigates the effect of pandemics pertaining to foreign direct investment (FDI) target countries on FDI inflows, with a focus on how FDI target countries' infrastructures modify the effect. Using a two-stage game model, we observe that (1) the effect of the pandemics associated with FDI target countries on FDI inflows is negative; and (2) the type of infrastructures heterogeneously modifies this effect. Moreover, the empirical results based on China’ data are consistent with theoretical findings. These results show that (1) pandemics of FDI target countries significantly reduce FDI inflows from China. As the worldwide pandemic uncertainty increases by 1%, FDI inflows from China decrease by 3.9%; (2) different types of infrastructures heterogeneously modify the effect of pandemics on FDI inflows. FDI target countries’ transportation infrastructures significantly mitigate the negative effect of pandemics on FDI inflows, whereas their information and energy infrastructures significantly exacerbate this effect. The empirical findings overcome endogeneity problems and exhibit robustness.