FDI: Hot or Cold Money? The Behaviour of Sectoral FDI Inflows and Outflows Over Periods of Growth Accelerations and Decelerations

Date01 August 2022
Published date01 August 2022
Subject MatterArticles
FDI: Hot or Cold Money?
The Behaviour of
Sectoral FDI Inflows
and Outflows Over
Periods of Growth
Accelerations and
Nadia Doytch1,2,3,4
The economic crisis caused by the COVID-19 pandemic invokes questions
about a possible prolonged economic deceleration. In this article, we study the
impact of output growth accelerations and decelerations, as per the definition
of Arbache and Page (2007, More growth or fewer collapses? A new look at long
run growth in Sub-Saharan Africa [Working Paper 4384]) and Conceicao and Kim
(2010, The asymmetric impact of growth fluctuation on human development: Evidence
from correlates of growth decelerations and accelerations. Mimeo), on sector-level
foreign direct investment (FDI) inflows and outflows for a group of 34 OECD
countries in the period 1995–2019. The results show that Finance services FDI
and transport services FDI inflows are countercyclical, while manufacturing FDI
outflows are procyclical. Transport services FDI outflows are countercyclical, and
the most significant determinant of both FDI inflows and outflows is the control
of corruption, respectively, in the host and home countries.
JEL Codes: F21, O16, O19
Sectoral FDI, inward FDI, outward FDI, growth accelerations, growth decelerations
Foreign Trade Review
57(3) 324–350, 2022
© 2022 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/00157325221092614
1 Koppelman School of Business, CUNY-Brooklyn College, New York, NY, USA.
2 Ph.D. Program in Economics, CUNY-Graduate Center, New York, NY, USA.
3 Ateneo de Manila University School of Government, Manila, Philippines.
4 University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam.
Corresponding author:
Nadia Doytch, Koppelman School of Business, CUNY-Brooklyn College, New York, NY 11210, USA.
E-mail: ndoytch@brooklyn.cuny.edu
Doytch 325
The economic crisis caused by the COVID-19 pandemic poses questions re-
garding the economic recovery in a period of a possible prolonged economic
deceleration. Growth accelerations and decelerations have attracted attention
during previous economic crises (Arbache & Page, 2007; Conceicao & Kim,
2010). The most recent global economic disruption in international capital ows
preceding the COVID-19 crisis was the 2008 Global Financial Crisis. The af-
termath of the Global Financial Crisis could also be viewed as a prolonged
economic deceleration. However, the COVID-19 crisis takes place in a world
that is even more interconnected than the environment during the Global Fi-
nancial Crisis. There is more integration via global supply chains, international
trade, movement of people, as well as better integration through internet and
telecommunication technologies (Doytch et al., 2021). Therefore, better global
integration may lead to a more pronounced effect of a prolonged economic decel-
eration, or a prolonged economic acceleration, if the world economies manage
to stimulate strong recoveries from the COVID-19 crisis. Since the COVID-19
crisis is still ongoing, in this article, we take a look at the period that preceded
and succeeded the Global Financial Crisis and analyse the effect of those eco-
nomic accelerations and decelerations on international foreign direct invest-
ment (FDI) ows.
Capital flow reversals and business cycle synchronization received increased
attention after the Global Financial Crisis of 2008. Several studies examine the
behaviour of capital flows as ‘hot’ vs. ‘cold’ money (Contessi et al., 2013), defined
in the 1990s (Claesens et al., 1995; Sarno & Taylor, 1997); the role of multina-
tional banks in output convergence during periods of crises and tranquility
(Kalemli-Ozcan et al., 2013a, 2013b); and the impact of sectoral specialization
similarities in business cycle synchronization (Dées & Zorell, 2012). Overall, the
studies agree that FDI flows represent a different category when capital flow
reversals are considered. FDI in aggregate is not ‘hot’ money. The above studies
also agree that financial FDI (multinational banking and insurance) plays a spe-
cial kind or role in business cycle transmission, implying that a sector-level exam-
ination of FDI is important. In addition, studies pay attention to the role FDI plays
in creating vertical and horizontal linkages and the impact that sectoral similarity
plays in business cycle synchronization.
The study we propose asks the reverse question-what is the impact of business
cycle fluctuations, and more specifically prolonged fluctuations, on FDI. First,
we use an alternative measure to account for such fluctuations, namely, output
growth accelerations and decelerations, defined and developed by Arbache and
Page (2007) and Conceicao and Kim (2010). Examining the impact of growth
accelerations and decelerations on FDI is somewhat related to exploring the
effects of financial tranquility and turmoil and similarly to Kalemli-Ozcan et al.
(2013b) allows us to answer whether FDI flows are procyclical (surging with
accelerations and declining with decelerations) or countercyclical, while explor-
ing the asymmetry of the effects due to prolonged expansions and contractions.
We address these questions to both FDI net inflows and outflows.

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