Foreign direct investment and output growth volatility: A worldwide analysis

The decades preceding the recent financial crisis and global downturn were a period of unusually mild output volatility for many developed and developing market economies. We analyse data from 85 countries and report findings consistent with the hypothesis that foreign direct investment had a stabilising effect on output during the era of the “Great Moderation”. These findings are consistent with, but not a direct test of, the theory that relates the waning of output volatility during these decades to the international diversification of net worth and a corresponding reduction in the strength of the Financial Accelerator. ► The study focuses on the output volatility across the world before the 2008 crisis. ► The results suggest that FDI had a stabilising effect on output during this era. ► Findings are consistent with reduced financial acceleration effects during this era.