Study sheds light on the impact of disasters on foreign investments
In the aftermath of disasters, foreign direct investments (FDIs) in the manufacturing sector take a dip but post positive growth in the long run. A study conducted by Dr. Nadia Doytch, assistant professor of economics at the City University of New York-Brooklyn College found that investments in services continue to be losing propositions for extended periods. Doytch presented the results in a talk organized by the Ateneo School of Government on November 12, 2016.
Speaking before an audience at the Hurtado Hall in the Ateneo de Manila University’s Loyola Heights campus in Quezon City, Doytch tackled the impact of disasters on foreign investments. Disasters, whether they are meteorological (weather-related), climate-related, hydrological (water-related) or geophysical (earth-reloated) in nature, can have an impact on a country’s FDI, she argued.
Applying the concepts of consumer choice theory, Doytch said that disasters may affect income: domestic assets lose value post-disaster thereby making them cheaper for foreign investors. It is also possible, she said, that capital damage and displacement of workers may result in the loss of capital, putting off foreign investors in the process. She added that the effect is dependent on the nature of the sector- manufacturing or services
Doytch merged data culled from the database of the Center for Research on the Epidemiology of Disasters with FDI sector data for 69 countries during the period 1980- 2011. Data was analyzed based on output growth, quality of institutions, and natural resource abundance.
Results showed that manufacturing FDI has a negative pattern immediately after a disaster. However, the sector starts to pick up in the long run, a finding Doytch said, is consistent with the creative destruction growth theory—innovation and growth ensue following market loss or destruction.
Services FDI are unaffected by meteorological disasters like storms, and wave surges. However, climate and water-related disasters like avalanches, floods, wildfire and extreme temperature lead to long-term negative effects on services FDI, Doytch said.
Doytch added that in terms of geophysical hazards like earthquakes, landslides and volcanic activity, both manufacturing and services FDI have a positive impact.
The study used data from several geophysical regions with different economic viability: Western Europe, Eastern Europe and Central Asia, South and East Asia and the Pacific, and Latin America and the Caribbean.