Prague Economic Papers 2015, 24(2):136-153 | DOI: 10.18267/j.pep.505

Foreign Direct Investment and the Business Cycle: New Insights after the Great Recession

Carlos Rodríguez, Ricardo Bustillo
University of the Basque Country, UPV/EHU, Avda, Bilbao, Spain (carlos.rodriguezg@ehu.es; ricardo.bustillo@ehu.es).

In this paper we examine how business cycles in the home country affect outward flows of FDI (OFDI). We employ a panel data set of OFDI flows for a representative sample of countries from 1970 to 2011. The findings of the regression models that we have used are consistent with the hypothesis that OFDI flows behave pro-cyclically. This is the case for different country subsamples, for different business cycle specifications and for the inclusion of other control variables as well. Beyond this main conclusion, home country interest rate and exchange rates reveal a negative effect upon OFDI flows.

Keywords: foreign direct investment, real exchange rate, multinational firms, business cycles
JEL classification: F21, F23

Published: January 1, 2015  Show citation

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Rodríguez, C., & Bustillo, R. (2015). Foreign Direct Investment and the Business Cycle: New Insights after the Great Recession. Prague Economic Papers, 24(2), 136-153. doi: 10.18267/j.pep.505
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