TY - JOUR

T1 - Risk, financial stability and FDI

AU - Kellard, Neil M

AU - Kontonikas, Alexandros

AU - Lamla, Michael J.

AU - Maiani, Stefano

AU - Wood, Geoffrey

N1 - Publisher Copyright: © 2020 Elsevier Ltd

PY - 2022/2/1

Y1 - 2022/2/1

N2 - All Foreign Direct Investment (FDI) involves risk. Augmenting the international finance literature, we assess the effects of financial system risk on FDI trends through considering both origin and host country effects. Motivated by the sovereign debt crisis and based on a dataset including bilateral FDI holdings, this paper investigates the implications of sovereign and bank-related risk on FDI in the Eurozone. Strikingly, we find that in terms of banking risk, it is only that encountered in the country of origin that has an impact on FDI choices. However, we find that sovereign risk, in both origin and host countries, have effects. As a corollary, we suggest that although poor financial discipline by host governments has been widely blamed as the primary factor likely to frighten off overseas investors, it is amongst FDI supplying nations that the effects of sovereign yields seem most pronounced. Policymakers in countries seeking to attract FDI should not only be attentive to domestic conditions, but also be aware of the financing environment that multinational enterprises (MNEs) encounter in their home countries and how this might impact on their choices.

AB - All Foreign Direct Investment (FDI) involves risk. Augmenting the international finance literature, we assess the effects of financial system risk on FDI trends through considering both origin and host country effects. Motivated by the sovereign debt crisis and based on a dataset including bilateral FDI holdings, this paper investigates the implications of sovereign and bank-related risk on FDI in the Eurozone. Strikingly, we find that in terms of banking risk, it is only that encountered in the country of origin that has an impact on FDI choices. However, we find that sovereign risk, in both origin and host countries, have effects. As a corollary, we suggest that although poor financial discipline by host governments has been widely blamed as the primary factor likely to frighten off overseas investors, it is amongst FDI supplying nations that the effects of sovereign yields seem most pronounced. Policymakers in countries seeking to attract FDI should not only be attentive to domestic conditions, but also be aware of the financing environment that multinational enterprises (MNEs) encounter in their home countries and how this might impact on their choices.

KW - Management studies

KW - Foreign direct investment

KW - Financial stability

KW - Sovereign yields

KW - Euro area

KW - International regulation

UR - http://www.scopus.com/inward/record.url?scp=85087750072&partnerID=8YFLogxK

UR - https://www.mendeley.com/catalogue/9b068077-2952-3ba0-aeba-8b38020e0265/

U2 - 10.1016/j.jimonfin.2020.102232

DO - 10.1016/j.jimonfin.2020.102232

M3 - Journal articles

VL - 120

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

SN - 0261-5606

M1 - 102232

ER -