The cyclical nature of North-South FDI flows

We examine how the business and interest rate cycles in developed countries affect FDI flows to developing countries. We aggregate FDI flows into three big source areas (the US, Europe and Japan), and find them to be countercyclical with respect to both output and interest rate cycles in the first two, and acyclical or mildly procyclical in the third. Our findings are consistent with the fact that FDI outflows and local investment tend to move in opposite directions during the cycles in the US and Europe, reflecting investors' arbitrage among different investment opportunities.