Do FDI Inflows to Eastern Europe and Central Asia Respond to the Business Cycle? A Sector Level Analysis

• Main Author: Doytch, Nadia
• Format: text
• Published: Archīum Ateneo 2021
• Subjects: Sectoral FDI; Economic fluctuations; Business cycles; Output gap; eastern Europe and central Asia; Business; Economics
• Online Access: https://archium.ateneo.edu/asog-pubs/206; https://www.sciencedirect.com/science/article/pii/S1703494920300414
• Institution: Ateneo De Manila University

This study aims at establishing the behavior of sectorial Foreign Direct Investments (FDI) inflows, i.e. FDI into the sectors of extractives, manufacturing, aggregate services, and financial and non-financial services, in relation to the business cycle. We construct a model that controls for established determinants of FDI, including income, human capital, quality of institutions, and natural resource endowments, and apply a dynamic panel GMM estimator to data for 19 Eastern European and Central Asian economies. The results suggest that aggregate services FDI inflows are countercyclical, increasing during economic contractions and decreasing during economic booms, while the rest of the FDI inflows are acyclical, i.e. do not respond to the business cycle.