Foreign Direct Investment and Output Volatility Nexus: A Global Analysis

Abstract

Volatility in output growth remains a genuine concern around the globe because of its detrimental effects on growth, poverty and welfare. In the realm of output volatility, the role of FDI and its consistency is particularly important and worth considering. This article examines the role of FDI inflows and specifically the instability in it on output growth volatility using a panel dataset of 141 world economies for the period 1971–2017. The study employs a variety of estimation techniques like pooled ordinary least squares (POLS), LS fixed effects (FE), LS random effects (RE), two stage least squares (2SLS) and generalised methods of moments (GMM). Findings of the study suggest that FDI acts as the volatility reducing factor, whereas uncertainty in it increases output volatility. On the policy front, this study recommends policies that not only encourage FDI inflows but also ensure the inflows to be more consistent and stable. Our results are robust corresponding to various above-mentioned estimation techniques and sensitivity analysis. JEL Codes: C23, E32, F21