Natural Disasters and Foreign Direct Investment

TLDR

Foreign direct investment has expanded globally while the frequency of natural disasters has risen. The study examines whether natural disasters influence foreign direct investment decisions. The authors analyze FDI flows in 94 countries from 1984 to 2004 in relation to the number of natural disasters each country experienced. The analysis shows that natural disasters are negatively and significantly associated with a country's foreign direct investment. JEL classification: Q54.

Abstract

The world's population has witnessed the concurrence of two powerful global trends: an unprecedented growth in foreign direct investment (FDI) and an increase in natural disasters. Since investment decisions are based on an evaluation of expected risks and returns, we consider whether FDI decisions are influenced by natural disasters. We do so by considering the relation between FDI in 94 countries between 1984 and 2004 and the number of disasters striking those countries. Across a variety of empirical tests that control for two-way fixed effects we find natural disasters to be negatively and statistically significantly associated with a country's FDI. <i>(JEL Q54)</i>