The effects of monetary policies on foreign direct investment inflows in emerging economies: some policy implications for post-COVID-19

Abstract

Expansionary monetary policies, which started to be implemented after the global crisis in 2008 and became widespread during the COVID-19 period, lowered global interest rates and increased the stock market indexes. This study aims to investigate the effects of expansionary monetary policies implemented before and during COVID-19 on foreign direct investment (FDI) flows to emerging economies. In this context, the effect of expansionary monetary policies on FDI has been tried to be determined through the changes created in financial indicators such as interest rate and stock market index. Accordingly, the effects of the developments in the global stock market index and interest rates on the FDI for Brazil, China, Turkey, and Poland were estimated using the autoregressive distributed lag (ARDL) model for the period 2008–2021. Empirical findings show that expansionary monetary policy practices before and during COVID-19 causing high global stock market index and low-interest rates encourage FDI inflows to developing countries. The empirical results on the effects of expansionary monetary policies applied before and during COVID-19 on FDI allow important implications to be made when considered together with the contractionary monetary policies to be implemented after COVID-19. So much so that our empirical results in favour of FDI flows to developing countries regarding the expansionary monetary policies implemented before and during COVID-19 imply that the transition to contractionary monetary policy in the post-COVID-19 period may cause significant constraints on the FDI inflows to developing countries. Therefore, it may be expected that favourable financial conditions for foreign direct capital inflows to developing countries will disappear in the post-COVID-19 period. In other words, the falling global stock market index and increasing interest rates along with the contractionary monetary policies implemented in the post-COVID-19 period will be able to have the potential to cause a significant change in the investment preferences of international companies towards developing economies. The general policy prescription obtained from the results of the study shows that developing countries would need much more FDI-attracting policies in order to compensate for the negative financial effects of contractionary monetary policies implemented in the post-COVID-19 period.

The Impact of Monetary Policy on the Transformation to Circular Economy: Does Foreign Direct Investment Speak?

“…In various studies, the results show that EMP impacts FDI in both positive and negative directions. (Karahan & Bayır, 2022) demonstrated that EMP positively impacts FDI when they studied the relationship between the two during the Covid-19 pandemic. When monetary policy is expansive before or during a given period, it could lead to a rise in global stock market indices and low-interest rates, facilitating the transfer of foreign direct investment (FDI) from developed to poor nations.…”

Monetary Policy and Foreign Direct Investment—Empirical Evidence

“…In addition, the business cycle has an impact on attracting international capital flows; a high growth rate is an important condition for a country to attract foreign capital flows for business development. Karahan and Bayır (2022) argued that contractionary monetary policy is likely to negatively affect the ability to attract FDI inflows in developing countries. Therefore, monetary policy has not succeeded in attracting international capital flows, especially when this policy was maintained during the recent COVID-19 period in many countries.…”

“…Economies 2023, 11, 234 2 of 13 central bank (Karahan and Bayır 2022). When the central bank implements expansionary monetary policy, interest rates will decrease and businesses can access capital at lower interest rates, benefiting both domestic and foreign businesses.…”

“…In this way, monetary policy can stimulate economic development. Conversely, monetary policy can be administered to adjust production to stabilize prices, which can help control inflation and economic growth (Karahan and Bayır 2022).…”

“…Research on the relationship of monetary policy and foreign direct investment has been discussed by many scholars. Karahan and Bayır (2022) argued that monetary policy has an effect on attracting foreign direct investment, that is, an expansionary or contractionary monetary policy has a negative or positive effect on FDI inflows. Albulescu and Ionescu (2018) also argued that monetary policy uncertainty has a negative effect on FDI inflows.…”