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

Abstract

AbstractExpansionary 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.