Epidemic outbreak and foreign direct investment fluctuation

This paper studies how foreign direct investment (FDI) inflows will fluctuate when the host country is hit by an epidemic outbreak. By analysing historical outbreak and bilateral FDI data from 2001 to 2012, we find FDI inflows during an outbreak are 21.5% below the pre‐outbreak average and 21.6% above the pre‐outbreak average FDI inflows in the 3 years after the end of an outbreak, which highlights the compensatory FDI after the end of epidemic and implies the uncertainty mechanism. We confirm the validity of the uncertainty mechanism, which converts the health shock into risk factors in the real economy, by studying the industry‐level heterogeneity and showing that the M&A in industries with lower redeployability is more sensitive to epidemic outbreaks. Finally, we explore country‐level heterogeneity that may influence the relationship between epidemic outbreaks and FDI inflows. We find that countries with poor medical conditions suffer greater decreases in FDI inflows during outbreaks, and countries with poorer institutional quality do not experience compensatory FDI after an outbreak ends.