The impact of inward FDI on output growth volatility: A country-sector analysis

While existing literature points to a positive impact of FDI on host countries’ growth, little is known about how inward FDI contributes to economic volatility in the host country. In this paper, we investigate the FDI-output growth volatility nexus focusing on manufacturing sectors of OECD countries over the period 1990 to 2015. We document a positive and statistically significant relationship between inward FDI stock and sectoral output volatility. We also show that the impact of inward FDI stock in downstream activities on volatility is larger compared to that of inward FDI stock in upstream activities which is not significant. Additionally, we find that the positive relationship between FDI and volatility is stronger in high capital-intensive industries. These results are robust to the use of a measure of FDI targeting practices.