Capital flows during times of crises: A study of 21st century economic crises and their impact on FDI-flows

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Capital flows during times of crises

- A study of 21st century economic crises and their

impact on FDI-flows

Bachelor’s Thesis 15 hp

Department of Business Studies

Uppsala University

Fall Semester of 2020

Date of Submission: 2021-01-14

Andreas Repeta

Carl Palm

Supervisor: Henrik Dellestrand

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Abstract

Foreign direct investment has been sharply affected by the global SARS-CoV-19 pandemic, as quarantine measures have decimated global trade, aviation and domestic economies through lockdowns which have wreaked havoc on markets. Macroeconomic indicators including GDP growth rates, unemployment, business confidence, consumer confidence, retail sales and inflation have all been negatively affected due to the simultaneous supply & demand shock caused by the pandemic.

Economic crises are a regularly occurring feature, with a degree of cyclicality determining their emergence. The uniqueness of crises, in their appearance and dissipation, stems from a large variance in relevant macroeconomic, fundamental and societal factors giving rise to the crisis in the first place, with the uniqueness being bound and pertinent to a selected period of time in history under which they occurred.

In this thesis we explored the impact of the two most significant economic crises of the 21st century, the Great Recession and the ongoing SARS-CoV-19 pandemic and their impact on capital flows, specifically on FDI-flows in two developed markets and two emerging markets. Our findings suggest that FDI-flows display a high synchronicity with stages of economic cycles, and tend to decrease during economic recessions and increase during economic expansions.

Keywords: Capital Flows, Foreign Direct Investment, Economic cycles, Great Recession,

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Terminology and abbreviations

Aggregated FDI A countries aggregated in- and outflow of finances

FDI Foreign Direct Investment - Firm investment in non-native markets Fiscal policy Actions undertaken by governments to influence the economy GDP Gross Domestic Product - Macroeconomics measurement Great Recession Economic downturn from 2007 to 2009

Inflows Finances flowing into a country

Interest rate Rate a central bank charges to borrow its money

Monetary policy Actions done by central banks to control money supply and growth OLI-Paradigm Ownership, localization, internalization - Model explaining FDI Outflows Finances flowing out of a country

PESTLE Macro-environmental framework for analysis of markets, business QoQ Quarter on Quarter - Statistical interval measurement

Recession Two quarters of consecutive QoQ negative GDP-growth SARS-CoV-19 Coronavirus, signifies an ongoing global pandemic since 2020 Unemployment rate The number of people who are unemployed in an economy YoY Year on Year - Statistical interval measurement

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5.1.1.2 SARS-Cov-19 Pandemic 23 5.1.2 United Kingdom 24 5.1.2.1 2007-2009 Housing Bubble 25 5.1.2.2 SARS-CoV-19 Pandemic 26 5.2 Emerging markets 27 5.2.1 India 27 5.2.1.1 2007-2009 Housing Bubble 28 5.2.1.2 SARS-CoV-19 pandemic 29 5.2.2 South Africa 30 5.2.2.1 2007-2009 Housing Bubble 31 5.2.2.2 SARS-CoV-19 pandemic 32 6 Analysis 33

6.1 Developed markets - Great recession of 2007-2009 33

6.1.1 The United States 33

6.1.2 The United Kingdom 34

6.2 Emerging Markets - Great recession of 2007-2009 35

6.2.1 India 35

6.2.2 South Africa 36

6.3 Developed markets - SARS-CoV-19 Pandemic 39

6.3.1 The United States 39

6.3.2 The United Kingdom 40

6.4 Emerging markets - SARS-CoV-19 Pandemic 41

6.4.1 India 41 6.4.2 South Africa 42 7 Conclusion 43 8 References 45 8.1 Printed 45 8.2 Articles 45 8.3 Appendix 50

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1 Introduction

Today, Foreign Direct Investment (FDI), comprises a substantial part of global GDP (OECD, 2020), as the world has become increasingly globalised and interdependent. Trade barriers have been reduced or eliminated since the middle of the 20th century. The rise of various political (EU), economic unions (EEA, ASEAN) and subsequent free-trade agreements (NAFTA, CISFTA), has resulted in significantly reduced cross-border trade barriers and subsequently increased FDI. FDI’s main contribution has been a gradual increase in economic standards spread evenly across the world, lifting millions of people out of poverty (Gapminder Foundation, 2020).

Intergovernmental organizations such as the World Trade Organization (WTO), regulating international trade between jurisdictions rose into existence in the late 1990s, with a global membership status of 164 countries (WTO, 2020). These numbers illustrate the rapid rise of international trade and the molding of a unified consensus on the importance of cross-country trade. The reasons underpinning this paradigmatic shift towards international trade lie in major political upheavals during the 20th century, and in a simultaneous cultural shift from valuing collectivistic values towards individualism (Marks, 2019).

In a multitude of geographies, political ideologies changed from emphasising socialistic policies and tilted towards values found in classical liberalism - particularly economic freedom. In 1978, China underwent revolutionary reforms termed “Socialism with Chinese characteristics'' which gave birth to a burgeoning market that manifested in double-digit growth the next 30 years (Marks, 2019). In 1991, the collapse of the Soviet Union resulted in a substantial shift of countries embracing market ideologies and gave access to an unprecedented amount of novel investment opportunities and future growth for global investors. The fall of the Berlin Wall further increased the cohesiveness and integration across the European landscape, a historical moment that has led to Germany being Europe's largest economy today (IMF, 2020).

International capital flows represent movement of capital across country-borders, movement which has risen significantly during the last century. It is classified among three major types -

foreign portfolio investment (FPI), loans and FDI (Razin and Sadka, 2007). FDI is as it sounds:

the process of investors deploying capital in foreign countries, nonnative to their own.

From a purely technical definition, FDI is when a firm invests directly in facilities to produce or market a good or service in a foreign country. Amassing a 10% interest in a foreign business

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entity constitutes FDI. Once a firm undertakes FDI it becomes a MNE (Hill & Hult 2016, p. 216).

FDI can be understood from a country-perspective, where certain inflows and outflows over the span of a year represent investments flowing into a country and flowing out of a country. The stock of FDI describes the total value of foreign-owned assets at a specified time (Hill & Hult, 2016, p. 216). FDI-flows during different economic phases, expansions and recessions, tend to oscillate, contingent upon unique innate constituent characteristics these economic phases present. International economic interdependence has led to a relatively high degree of synchronicity between business cycles and FDI-flow (ECB, 2004).

1.1 Prior research focus

Previously conducted meta-studies (Paul & Cestero, 2020) on the concept of FDI have identified key constructs of epistemological and ontological constituents in the utilised analytical

frameworks of prior FDI studies. A comprehensive and graphical illustration below pinpoints the most common theories applied in describing FDI as a phenomenon.

Figure 1. Different frameworks and models.

Notably, the Eclectic Paradigm, also known as the “OLI framework” and “Internalization” are perhaps the most intuitive theories that share interrelationary aspects in describing

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FDI-phenomena. Closely related to the OLI-framework is “TCE”, referred to as “Transaction cost

economics”, which is a part of TCA, “Transaction cost analysis”.

All three aforementioned theories intersect, since FDI as a concept is based on an international environment of firms undertaking investments in foreign markets. Analysis in accordance with the OLI-framework is assessed by its component characteristics: Ownership, Location and

Internalization. Clearly, we can see that parts of the OLI-framework integrates with the logic of

“Internationalization” laid forward by the works of Hymer, Rugman, Kindleberger, Buckley and Casson as indicated in figure 1. Transaction cost theory in and of itself relates to the meticulous and precise process of basing decisions on differential cost-bases in order to conduct FDI, and thus relates to the OLI-framework (Paul & Cestero, 2020; Pitelis & Sudgen, 2000, p. 74).

The emphasis of this study is to limit the utilisation of the most relevant and applicable models in describing international capital flows, which would be the OLI-framework in combination with the PESTLE-model. The OLI-framework in conjunction with a PESTLE-model, a macro-environmental model utilised in the scanning of various research disciplines; such as business, economics and politics. It is comprised by the Political (P), Economic (E), Social (S),

Technology (T), Legal (L) and Environmental (E) factors that describe various aspects related to

that specific factor, e.g., government is within (P), macroeconomics within (E), culture (S), Internet (T), law & regulations (L), environment (E) (Gupta, 2013).

The combination of the OLI-paradigm and the PESTLE-model would eloquently describe and capture the differential qualitative aspects influencing FDI-flows. By solely focusing on the OLI-framework and PESTLE, which in and of themselves intuitively intersect with other theoretical frameworks, we capture the majority of the studied FDI-phenomena whilst keeping simplicity and a clear-cut focus and simultaneously keeping the scope of the study limited to the confines of the research question.

It is important to note and understand that FDI-flows are defined as MNEs conducting FDI, and that the aggregation of MNEs at a country level describes country FDI-flows, both inflows and outflows. Aggregated FDI-flows at a country and global level are thus to be equal to the context the study participates in. Inflows and outflows, are thus to be considered as variables studied, along with other pertinent macroeconomic variables previously discussed.

Earlier research on FDI-flows has primarily emphasised studying FDI from a micro-perspective. Essentially, the various processes underpinning FDI have been studied on a multinational-enterprise level (MNE), giving rise to MNE-FDI. Applied theoretical lenses have been -

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Institutional theory, and Resource Based view (Paul & Cestero, 2020). However, scant research

has been aimed at studying FDI from a macro-perspective, mainly focusing on aggregated inward and outward FDI-flows on a country level, and little has been written on how economic cycles have impacted these aggregated country flows. Moreover, even less has been researched on subsequent policy responses, both monetary and fiscal, in tackling these crises and their impact on FDI-flows. While existing research on aggregated country FDI-flows has taken into consideration certain dependent and independent variables within the economic framework, such as GDP, Export, Import, Gross Capital Formation, it has given little notice to other equally or more important economic variables that could potentially provide a more unique and all-encompassing explanation as to the mechanisms explaining changes in flows of country FDI (Ibid).

In studying FDI-flows, the PESTLE-model would encapsulate other potentially useful and unexplored macroeconomic indicators: interest rates, core inflation, unemployment rates under the economic (e) factor. These are often indicators that monetary policy makers base their decisions on, in influencing the aggregate money supply and inflation levels, affecting a broad range of economic phenomena; ranging from stock markets to currency rates (Markets

Committee, 2019). Fiscal policy, namely the changes in stimulating the economy via government spending would also be altered and evidently expressed during times of crises. The nature of fiscal policy and its reliance on the government poses further questions as to whether the

different directions fiscal policy undertakes is contingent on ruling parties and dominant political ideology (Alberola & Sousa, 2017; Alberola et.al., 2020).

Research thus far is reflected in a small amount of knowledge in existing literature and has not adequately provided answers to how FDI-flows differ between countries with different political systems and differentially expressed fiscal policy response as a consequence of ideology. Provided the enormous influence monetary and fiscal policy makers bear on shaping entire economies, it is not unreasonable to assume that intra-country and inter-country coordinated policy responses influence the direction of international aggregated FDI-flows in the globalised economy during different phases of the business cycle, importantly, in the context of this study - during economic recessions (Monetary and Economic Department, 2008; Soner Baksaya et.al., 2016).

Traditionally-applied theoretical models in studying FDI, such as the OLI-paradigm, with its emphasis on Ownership, Localization and Internalization, have enjoyed historical success in explaining the decision-making of MNEs (Paul & Cestero, 2020). Aggregated MNEs

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constituting country FDI-flows and global FDI-flows, and their decision-processes, could potentially be explained by how macroeconomic indicators and policy response during different economic phases alter and change the perceived advantages by the constituent factors of the OLI-paradigm, and henceforth the direction of FDI-flows (Razin & Sadka, 2007, p. 6).

Therefore, given the significance and size of FDI-flows in the global economy, it is important to analyse if and how these phenomena change during times of crises, since cross-border trade today makes up a significant size of global GDP and subsequently, oscillations caused by economic cycles, indirectly affect living standards of people on the planet.

1.2 Problem statement and objective

The global and societal changes during the 20th century have resulted in a globalised landscape, with international trade flourishing with subsequent increases in capital flows and FDI.

However, we have found scant research on the implications of FDI-flows in the unprecedented globalised era we find ourselves in, particularly during times of crises in the 21st century, and the associated modern policy responses in tackling these crises. Current research suggests that FDI-flows are highly synchronised with the phases of the business cycle. The thesis aim is to analyse if this has persisted during the two most significant crises of the 21st century.

In sum this study aims to answer the following question;

How were FDI-flows affected as a result of the economic consequences of the U.S. subprime mortgage crisis of 2007-2010 and the global SARS-CoV-19 pandemic of 2020?

In this globalised era, among the most sophisticated developed economies are the United States, the United Kingdom (IMF, 2020). The biggest emerging markets include the BRICS-countries; Brazil, Russia, India, China and South Africa. Coincidentally these developed economies are the biggest sources of historical outflows and the emerging markets are high recipients of FDI-inflows (OECD, 2020).

Therefore our thesis aims to analyse and compare the two most significant crises in modern times; the global SARS-CoV-19 pandemic of 2020 and the U.S. subprime mortgage crisis of 2007-2010. Our aim is to investigate how FDI-flows were affected by both crises in two

emerging markets in the BRICS-category, especially; South Africa and India. Whilst

simultaneously cross-examining how flows were impacted in developed markets such as; the United States and United Kingdom.

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2 Theory

Below, the analytical framework will be presented below, that will enable an astute analysis of the posed research question.

2.1 PESTLE

When analyzing exogenic factors, the PESTLE-model is one of the most common models to use. It is applicable on country-levels and micro-levels, such as MNEs, and subsequent aggregation of MNEs that result in aggregated FDI-flows. The model contains six constituent parts: Political,

Economical, Social, Technological, Legal and Environmental factors. All of these factors are

meant to cover every facet of importance in this thesis and create a wider understanding of postulated questions and problems (Gupta, 2013).

2.1.1 Political

Countries are complex structures, composed of several systems, that often merge and intersect with each other. The political system plays a key role in governing a country and also influences the shape and creation of the economical and legal system. In-depth analysis of subsequent factors relating to the political system cannot be conducted after a thorough analysis of the political system. Notable aspects of the political sphere includes corruption, foreign trade policy, political stability and trade restrictions, all of which influence the attractiveness of countries and potential foreign investment (Hill & Hult, 2016, p. 40-43).

2.1.2 Economical

Several macroeconomic factors influence the economy of a country. These include but are not limited to: annual GDP-growth, interest rates, exchange rates, unemployment rates and

consumer disposable income. These factors have differential impacts on an economy, some

directly and some indirectly, and these effects may influence the attractiveness of conducting FDI and subsequent flows. Exchange-rates in emerging markets seem to display particular sensitivity in influencing the flows of FDI (Yeates et.al., 2014, p. 44; Turner, 2008).

2.1.3 Social

Social factors include culture, which is said to be composed of values and norms of citizens in a particular country. Hostile cultural values towards globalisation and internationalisation might lead to restrictive FDI-policies and reduce cross-border flows. Demographic data, such as

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birth-rates, mortality, average life-expectancy, migration, emigration in conjunction with the shape of the population pyramid influences other factors in the PESTLE-model and, by extension, society. Additionally, income-distribution and social class are also central tenets in gaining a deeper understanding of the population of a country (Hill & Hult, 2016, p. 226).

2.1.4 Technical

Technology, concerns with the degree of technological adoption prevalent in societies, higher use of technology increases efficiency, productivity and annual GDP-growth rates. Innovation and political policies favouring it are often displayed by prominent corporations utilising sophisticated technologies. Automation, research and development are thus additional core-factors underpinning increased technological penetration. Specific subsets of FDI-flows are drawn to countries with highly developed technological capabilities (Hill & Hult, 2016, p. 301; Yeates et al., 2014, p. 44).

2.1.5 Legal

Functioning legal systems are a prerequisite for increasing FDI-flows in and out of a country, as they increase attractiveness since property rights are recognized and enforced. Political policies and their stance towards FDI affect regulation and subsequent laws governing

FDI-restrictiveness. Countries with low FDI-restrictiveness tend to have higher aggregated FDI-flows than countries scoring high on FDI-restrictiveness (Hill & Hult, 2016, p. 47; OECD, 2020).

2.1.6 Environmental

Environmental factors concern the environment and the associated changes that occur within this analytical context of the PESTLE-model. Industries or entire countries are analysed from an environmental perspective. In regards to FDI-flows, there is a growing pressure from certain unions (E.U.) on imposing environmental tariffs on products and services originating from non-member states which do not prioritize environmental policies, in order to incentivize the creation of a more environmentally focused legislation (European Parliament, 2019; Hill & Hult, 2016, p. 26).

2.2 The Eclectic OLI Framework

The Eclectic OLI framework is a framework studying FDI and was developed by Dunning in 1977. The framework has proven very effective when measuring multinational enterprises (MNEs) and bears a large significance in modern economics and international business (Neary,

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2009). The framework is not in itself a formal theory able to analyse scientific data but has the specificational ability of aiding in the categorization of analytical data and research within FDIs (Ibid). The OLI framework consists of three sub-paradigms (Dunning, 2000) explained in detail below.

2.2.1 Eclectic paradigm at the micro-level (MNEs) and capital flows

FDI can be differentiated in two ways: the micro- and macro level. The micro level refers to the company's own interests and their trade into foreign countries, the market imperfections and the firm's willingness to expand their power on foreign markets. The micro perspective is generally composed of a firm's own interests and the firm-specific advantages on the international market (Razin & Sadka, 2007, p. 5).

2.2.2 Eclectic paradigm at the macro-level and capital flows

The second category is the macro perspective, i.e., the aggregated flows of international trade. FDI measures not only the flow of trade and goods, but also the flow of finances. FDI can be done in different modes of entry, either greenfield stage or a purchase of an already established firm with a so-called merger and acquisition (M&A), another form is through modes of finance. Regarding the modes of finance, there are some distinctions that must be made between the different forms of finances which are reinvestment of maintained profits, loans within the company and equity capital (Razin & Sadka, 2007, p. 6).

2.2.3 Ownership

First of the sub-paradigms is the competitive one: ownership (O). That is when an enterprise wishes to engage in a FDI or extend their already existing FDI, and this in regard to the micro perspective of capital flows (Razin & Sadka, 2007, p. 5). These investments are specific to their enterprise (Dunning, 2000; Brouthers, Brouthers & Werner, 1999). The ownership paradigm describes when to and how to enter the foreign market and the competitiveness within the entry market. When their own enterprises have more competitive advantages, then they are more likely to engage in the foreign investment (Dunning, 2000).

2.2.4 Location

The second sub-paradigm is, location (L). This is within alternative countries or regions for which value adding activities are manageable for an MNE or a country in regard to the micro firm level or in the aggregated country macro level (Razin & Sadka, 2007, p. 6). This sub-paradigm proposes that the more unmovable, natural or creating donations that the company or

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country has to include with their own competitive advantages. This benefits establishing a presence abroad rather than only being domestic, and will result in more firms choosing to expand and use their O-specific advantages when competing in FDI (Dunning, 2000). Location advantages are also a resource-based sub-paradigm, which includes concerns regarding

commitment issues within resources, the cost of those resources and the availability, which also combines with macro-economics and economic flow regarding resources (Brouthers, Brouthers & Werner, 1999; Razin & Sadka, 2007, p. 6).

2.2.5 Internalization

The third sub-paradigm of the OLI framework, Internalization (I), gives a frame for where companies at the micro-level, or an aggregation of companies, that constitute FDI-flows at a macro level of entire countries can evaluate and organise the creation and exploitation of their core competencies in combination to their attractions in different countries or regions, as

mentioned in L. Those methods vary from buying or selling merchandise or services on the open market or through a line of inter-firm non-equity agreements between companies, integration within interstitial product markets and direct purchases of international corporations (Dunning, 2000).

2.3 Synthesis

The presented theories and analytical frameworks utilised in prior studies on FDI have been adapted to the uniqueness of phenomenon transpiring on the micro-level of MNE-FDI. Not all theories would be suitable nor applicable from an analytical standpoint in studying aggregated country flows of FDI on a macro-level. In our analysis of previously conducted studies, we have noticed that there is an overemphasis on studying MNE-specific phenomenon and details, not generalizable in the context of understanding FDI-flows on a macro-level (Paul & Cestero, 2020). Fundamentally, a lack of generalizability exists in studying macro-level phenomena of FDI. In order to bridge this gap in research, it is important to evaluate and come up with novel frameworks of studying aggregated FDI-flows on a global scale, taking theories or suitable elements of particular theories from the most-commonly presented theoretical frameworks in tandem with other previously unused theories in studying FDI that could complement the chosen theory in explaining nuances that itself could not have been done in isolation. In essence, a synthesis of prior theories and novel analytical framework has to come to fruition.

The OLI-paradigm, with its focus on the constituent factors of ownership, location and

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transcends both the micro and macro perspective of describing FDI-flows. Since international capital flows are mobile, it is likely that flows will oscillate towards locations providing the most economic opportunity and oscillate away from geographies presenting unfavourable economic opportunities. Ownership will thus be contingent on location and the internalization part of OLI, will serve as a factor in determining if locations are open towards foreign trade and present low levels of protectionism (Paul & Cestero, 2020).

Protectionism, and its relation to FDI, can be explained by FDI-restrictiveness. In essence it is a measurement of how open countries are towards FDI. Government policy and politics play an integral part in influencing FDI-restrictiveness. Favourable and open government policy leads to low levels of protectionism and low FDI-restrictiveness, whilst hostile and protectionist policy leads to higher FDI-restrictiveness. Government policy therefore influences decision-making in the OLI-paradigm. Traditionally, research surrounding FDI has not significantly analysed governmental policy and its effect on aggregated country FDI-flows (Paul & Cestero, 2020). The PESTLE-framework, analysing the political, economical, social, technological, legal and

environmental factors would provide the necessary and complementary perspectives necessary in

bridging and providing insights into the mechanics underpinning the OLI-framework. While governmental policy is a critical factor in studying FDI-flows, both on the micro and macro level, supplementary factors intersecting and influencing governmental policy are crucial in order to conduct a conducive analysis. Economical factors are arguably self-evident during times of economic crises, being the most prominent factors in influencing policy makers in terms of initiating fiscal and monetary policy response in tackling unfolding crises (Gupta, 2013). Likewise, technological factors are equally important at times. During the IT-mania in the late 1990s, stock markets propelled to bubble-like highs, driven by rapid changes in technology. The aftermath led to fiscal and monetary stimulus being put in place. In this instance, economical,

technological and political actions were intertwined in explaining the entirety of phenomena.

Similarly, social and environmental factors are important, depending on circumstances. Protests in the aftermath of 2008 were a prominent factor in shaping protective financial and economical legislation during the 2010s. Environmentally, pollution bears tremendous costs for society, and as a factor intertwines with other focal points of the PESTLE-model (Gupta, 2013).

Combining the OLI-paradigm and the PESTLE-model would therefore provide a suitable and tailored synthesis in analysing and dissecting aggregated FDI-flows during economic recessions. In acknowledging the bidirectionality of factors influencing each other from the OLI-paradigm,

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in conjunction with the PESTLE-model, one captures a wide-range of phenomena relevant in explaining and studying aggregated FDI-flows.

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4 Research method

Capital flows are a complex global phenomena, bidirectional in nature and displaying an inherent sensitivity to the transient nature of ever changing oscillations measured throughout larger time scales.In our study, we aim to analyse a subset of these capital flows by focusing on FDI-flows, defined as “inflows” and “outflows” out of countries. The intricacies and

codependent nature of the global economy forces us to focus on certain geographies, with a special emphasis on a handful of selected countries. Encompassing the FDI-flows of the

following countries, The United States, The United Kingdom, South Africa and India, the sample is set to represent the largest and most sophisticated developed economies of the world in a descending order of size (IMF, 2020), and a selection of emerging market economies from the BRICS-category.

Contrasting between developed market economies and emerging market economies in the sample has been chosen due to the differing market dynamic complexities (Ratten et.al., 2007) inherent to these two groups of economies. Therefore, it is our assumption that this bifurcation is set to yield potentially unique insights into the mechanics of FDI-flows of these two

categorizations of markets.

The complexity of studying FDI-flows as a phenomena, and the multitude of factors affecting them, often beyond the intuitively assumed quantitatively economic factors presents a particular challenge in studying flows. Traditionally, research surrounding the aspect of FDI-flows has been heterogeneous with a quantitative methodological anchor (Paul & Cestero, 2020) with a lesser degree of emphasis on other qualitative aspects impacting FDI-flows. Bridging this gap between traditionally used quantitative methodologies in earlier research and lesser used qualitative methodologies and focusing on a more novel descriptive quantitative methodology, with qualitative features, in studying FDI-flows bears the peripheral benefit of capturing “softer

values”. These are not always possible to capture and subject to quantification in a purely

quantitative methodology. A descriptive quantitative methodology offers, with these qualitative elements, offers a more complex, deeper and richer understanding into such a rapid and ever-evolving process such as FDI-flow.

Utilising a descriptive quantitative method with qualitative elements, in comparison with a pure qualitative method also bears the benefit of offering a more descriptive and contextual

understanding of flows, which is a proper fit given the high contextuality and bidirectionality of FDI in and of itself. Moreover, given the postulated research question and the unique

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circumstances unfolding, in terms of a global pandemic, a descriptive quantitative methodology provides a better emphasis on the study of processes, in our case, a continuous and changing process of FDI-flows during crises (Bryman & Bell, 2019, p. 417).

Imposed time-constraints and the nature of studying FDI-flows necessitates the utilisation of secondary data collection in this study. Benefits of utilising secondary datasets include the collective experiential knowledge pool of previous researchers in presenting the sought data, offering complementary benefits to the authors of this study in drawing astute conclusions on the presented data. Additionally, the data sought in this study are regularly scheduled for release by statistical agencies around the world, making it infeasible and unrealistic in recreating the required data by this study (Bryman & Bell, 2019, p. 554).

Scheduled data, in terms of FDI-flows, and other data relevant to this study is released in the form of documents and is publicly available. Aggregated datasets are usually available and disseminated through a wide variety of databases, offering a degree of transparency that ensures reliability, validity and replication of potential findings in this study. Koyfin, is an aggregated and free database specialised in economic and financial data, that is going to be primarily utilised and referenced by in this thesis. Additional information pertaining to the codes utilised in Koyfin to draw the charts in this thesis, can be viewed in the appendix.

Data-presentation is set to be conducted via the use of descriptive statistics. Descriptive statistics offers a top-down view of wider phenomena that can be compared over larger time-frames, and crucially provides intuitive insights into the evolving elements that underpin FDI-flows, which fits astutely into the wider quantitative framework adopted in this study.

4.1 Methodological critique

Critique against the qualitative framework, and in our thesis, the qualitative elements, has

primarily been focused on a key number of tenets, specifically that it is too subjective, difficult to

replicate, difficult to generalize, and has an inherent lack of transparency, in comparison with a

more quantitative framework (Bryman & Bell, 2019, p. 413-414).

While this critique has some validity, it is important to recognize that the data gathered in this study is primarily quantitative. Therefore, associated risks of replicability and subjectivity are severely reduced and in comparison with other more purely qualitative disciplines. Subjectivity is not completely eliminated, as the interpretation of the quantitative data and the associated results provides room for subjective interpretation and potentially differing conclusions as a result of different interpretations (Ibid). (Bryman & Bell, 2019, p. 621).

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4.2 Operationalization

Figure 2. Operationalization of concept

The study was designed from a structuralized context, implying that applicable and relevant concepts were chosen in comparison to relevant literature, in order to create points of

measurement and provide definitions in interpretation of meaning. Concepts are variablized, with definitions of interpretation, clearly illustrated in the schematic above. In addition, for the

relevance of this study we have discarded some factors of the PESTLE-model, such as the Technological and Environmental factor as they are of insignificant relevance for this thesis. All parts of the operationalization were built on the utilisation of secondary data sources,

carefully selected in order to establish a coherent framework in the measurement of concepts and overall operationalization construct. Focused and pedagogical operationalizations provide clarity and depth in the analysis of concepts and their variables. Specifically, for this study, confining ourselves to the focal point of studying FDI, and adjacent concepts most relevant in inferring arguments surrounding FDI, it is our aim to present an elegant and logical way of structurizing and interpreting the collected data from secondary sources. Potentially arising complications such as the incorrect classification of answers are minimized as the adjacent concepts serve as complementary pillars in understanding the multifaceted and dynamic concept of FDI.

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Furthermore, additional concepts in comparison with the utilisation of a couple of concepts, bears the benefit of increasing the likelihood of deriving insights from the analysis that are central and within the scope of the research question. By focusing solely on a few concepts, periphery arguments and subsequent logical conclusions are avoided, as these are beyond the scope of this study. Analysing FDI during recessionary periods provides dimensionality to the proposed main concept of FDI. Variables are the dimensions that define FDI as an interpretation, whilst also describing potential observed changes in FDI during times of crises (Bryman & Bell, 2019, p. 156-160).

In the following section, the graphs illustrating our four macroeconomic variables have been color-coded according to a specific structure; blue is FDI, purple is interest rate, orange is unemployment rate, yellow is GDP-growth rate. Color-coding has been conducted in order to increase the specificity and interpretation of our operational definitions.

The descriptive presentation of data in this research study, emphasising in particular a top-down view in the analysis of secondary data and the chosen variables exemplify the difficulties in studying FDI.

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5 Empirical data

The following material will be presented in a chronological order, country by country. In every graph the chosen variables are presented in different colors; blue is aggregated FDI, purple is interest rate, orange is unemployment rate and yellow is GDP growth rate. Furthermore, the charts contain all the information of variables needed to explain the choices made by governments and central banks within this thesis.

5.1 Developed markets

5.1.1 United States of America

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5.1.1.1 2007-2009 Housing Bubble

U.S. FDI $ Million Interest rate % Unemployment % GDP - QoQ % 2007 - Q1 ⟶ 2007 - Q2 ⟶ 2007 - Q3 ⟶ 2007 - Q4 ⟶ 33,833.00 37,327.00 29,654.00 20,147.00 5.25 5.25 4.75 4.25 4.40 4.60 4.70 5.00 0.9 2.3 2.2 2.5 2008 - Q1 ⟶ 2008 - Q2 ⟶ 2008 - Q3 ⟶ 2008 - Q4 ⟶ 31,718.00 38,771.00 29,058.00 26,175.00 2.25 2.00 2.00 0.25 5.10 5.60 6.10 7.30 -2.3 2.1 -2.1 -8.4 2009 - Q1 ⟶ 2009 - Q2 ⟶ 2009 - Q3 ⟶ 2009 - Q4 ⟶ 13,199.00 25,058.00 25,368.00 34,366.00 0.25 0.25 0.25 0.25 8.70 9.50 9.80 9.90 -4.40 -0.60 1.50 4.50

Table 1. Appendix 1, U.S.

The U.S. has historically been one of the largest economies of the world, a position that it

maintains to this day. A large population of 330 million citizens illustrates the size of the market. Sophisticated and highly liquid financial markets characterized by the largest amount of Fortune 500 companies in the world is a testament to their dominance in the global economy.

In 2007-2009, the U.S. entered a recessionary phase in its economy, due to the popping of the housing bubble caused by inflated house-prices. The collapse of the renowned investment bank “Lehman Brothers” initiated a chain-reaction of collapses in derivative prices with underlying assets tied to mortgage bonds (MBS), collateralized debt obligations (CDO) affecting the solvency of banks in the U.S. and subsequently international institutional entities and foreign economies (Lane, 2014; Mutikani, 2009). Unemployment surged from 8.7% to 9.9% in 2009 (BLS, 2012), as depicted in figure 3. Annual-GDP growth-rates fell negative from 0.9% in Q1 2007 to -8.4% in Q4 2008. FDI took a nosedive, as illustrated in figure 3.

World trade during 2007-2009 was almost decimated, and it had severe repercussions on global capital flows: the USD appreciated against other currencies, and FDI-flows were significantly reduced both in the U.S. and internationally. Eventually, FDI-flows stabilized and regained some of their prior levels seen before the initiation of the crisis.

The United States Federal Reserve (FED) launched stimulatory monetary efforts, in order to boost aggregate demand. Interest rates were lowered sequentially from 5.25% to 0.25% during 15 occasions throughout the crisis (Table 1). The FED also initiated an extensive Quantitative

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Easing program, which is the process of purchasing mortgage-backed and government bonds on the open market in order to add additional liquidity to the financial system and re-inflate price levels (Norrestad, 2020).

When looked upon from a later stage, the market during the recession was handled by G-7 and they took all the steps deemed necessary, including lowering the policy interest rates. In this way, financial means were put into circulation and in that way eased the situation and managed to reduce the once-staggering panic (Lane, 2014). Due to the policy actions being coordinated and aggressive, they suppressed an economic and financial collapse equal to the Great

Depression of the 1930s. What is important to mention is though the collapse still occurred throughout the whole world. Though the actions taken did, in fact, decrease the economic disaster, the world was still left with an unstable financial future and uneven global growth (Ibid).

5.1.1.2 SARS-Cov-19 Pandemic

U.S (2020) FDI $ Interest rate % Unemployment % GDP - QoQ % Q1 ⟶ 34.578,00 0.25 4.4 -5.0 Q2 ⟶ 26.661,00 0.25 11.1 -31.4 Q3 ⟶ -- 0.25 7.9 33.1 Q4 ⟶ -- 0.25 -- --

Table 2. Appendix 1, U.S.

In the year of 2020 a recession ensued started due to the SARS-CoV-19 pandemic, an economic and social recession that changed and is changing the world even as this thesis is conducted. The unemployment rate has reached new levels compared to earlier recessions, dating back to 1948. The unemployment Q2 in 2020 was at a staggering 11.1% and slowly started to decrease into 7.9% in October (Table 2). Looking at figure 3, it can be interpreted as stating earlier that the unemployment level took a direct hit from the SARS-CoV-19 pandemic but decreased quite fast in comparison to unemployment levels in 2008 and 2001 recessions.

In figure 3, interest rates in 2020 were cut very rapidly as a stimulatory measure, whereas during 2007-2009, rate-cuts were done in a sequential-fashion. In March of 2020, the FED initiated a quantitative easing program, via open market operations based on the purchase of mortgage-backed securities, government bonds and corporate debt. By doing this, it mitigated any fears of

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imminent credit-default risk at banks and restored faith in a swift recovery of financial markets. In the ongoing pandemic, the U.S. government has so far injected an estimated 3$ trillion in fiscal relief in order to intensify stimulatory measures to stimulate aggregate demand. The combination of monetary and fiscal stimulus stabilized GDP and led third quarter GDP to gain 33.1% in comparison with the negative GDP-figure of 31.4% in the second quarter of 2020. In reference, the recession of 2007-2009 saw a severe GDP decrease of approximately 8% (Table 1).

5.1.2 United Kingdom

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U.K. FDI £, k Million Interest rate % Unemployment % GDP - QoQ % 2007 - Q1 ⟶ 2007 - Q2 ⟶ 2007 - Q3 ⟶ 2007 - Q4 ⟶ 30,184.00 16,108.00 27,016.00 31,269.00 5.25 5.50 5.75 5.50 5.5 5.4 5.3 5.2 0.9 0.6 0.8 0.5 2008 - Q1 ⟶ 2008 - Q2 ⟶ 2008 - Q3 ⟶ 2008 - Q4 ⟶ 39,589.00 18,265.00 19,733.00 64,824.00 5.25 5.00 5.00 2.00 5.20 5.40 5.90 6.40 0.5 -0.6 -1.6 -2.1 2009 - Q1 ⟶ 2009 - Q2 ⟶ 2009 - Q3 ⟶ 2009 - Q4 ⟶ - 1,041.00 - 44,536.00 35,100.00 16,694.00 0.50 0.50 0.50 0.50 7.10 7.8 7.8 7.8 -1.7 -0.2 0.1 0.3

Table 3. Appendix 1, U.K.

The United Kingdom, one of the oldest and most sophisticated developed markets in the world, was severely affected by the ensuing recession during the collapse of the housing bubble in 2007-2009. Unemployment increased rapidly during Q4 of 2008 and Q1 of 2009 and peaked at 7.10% (Figure 4). It took almost 5 years before unemployment levels started to descend, and this also correlated with a drop in annual GDP-growth rates (orange line, figure 4) during the crisis. GDP-growth decreased 1.7% in Q1 of 2009 (Table 3). FDI-flows were affected as seen in Figure 4, taking a huge hit and not recovering and reaching the same levels until 2014.

Monetary policy response was swiftly implemented in order to battle the recession: interest rates were lowered by the Bank of England (BOE). Figure 4 demonstrates the sequential lowering of interest rates, influencing the mortgage costs on loans in the country. The Bank of England also increased liquidity by a Quantitative Easing program (QE) (as explained in 4.1.1). Her Majesty's Treasury piled in approximately £150 billion in the purchase of government debt, mortgage-backed securities and corporate debt. The additional liquidity provided by the QE-program eased the severity of the recession and enabled a quicker recovery than would have otherwise been possible. Despite these measures, overall GDP-growth decreased -2.1% in the Q4 of 2008 (Tradingeconomics, 2009; Table 3).

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5.1.2.2 SARS-CoV-19 Pandemic

U.K. FDI £, k Million Interest rate % Unemployment % GDP - QoQ %

Q1 ⟶ 7,805.00 0.10 3.90 -2.5

Q2 ⟶ -5,474.00 0.10 3.90 -19.8

Q3 ⟶ -- 0.10 4.80 15.5

Q4 ⟶ -- 0.10 -- --

Table 4. Appendix 1, U.K.

Early in 2020, the SARS-CoV-19 pandemic swept the entire globe and influenced the global economy in a way not seen since the Spanish Flu. Until this moment, the U.K. economy grew at a steady pace, unemployment levels were low, foreign-direct investment was high and GDP-growth was positive. Resulting societal shutdowns of businesses and travel led to an

unemployment surge to 4.8% in Q3 of 2020, an increase of 0.9% compared with Q1 of 2020 (Tradingeconomics, 2020a; Table 4). Unemployment levels increased far more than in comparison with the unemployment levels seen in 2007-2009.

Stimulatory measures were taken by the Bank of England by swiftly decreasing interest rates to 0.1%. The additional liquidity as a result disincentivized consumer saving and incentivised spending, aiding in the boosting of economic growth. The Bank of England also unleashed a Quantitative Easing program, consisting of buying 645b £ of assets in Q1 of 2020, increasing it to 745b £ in Q2, and to 895b £ in Q3. These asset purchases consisted of buying different asset-classes such as: government bonds, mortgage-backed securities and corporate debt. Inflation levels increased slightly by these stimulatory measures and increased from 0.3% in Q2 to 0.6% in Q4 (Tradingeconomics, 2020b).

In the first three quarters of 2020, GDP-growth levels fluctuated. At the beginning of the year a negative GDP-growth-rate of -2.5% was recorded, in connection with the decreased productivity due to rising unemployment (Table 4). Preliminary GDP-levels in Q3 were revised due to the initiation of a second Coronavirus-wave. The BOE revised its growth numbers as a result of the second wave and predicted the economy shrinking 11% in Q4 2020, worse than an initial prediction of -5.4% (Tradingeconomics, 2020c).

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5.2 Emerging markets

5.2.1 India

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India FDI ₹, k Million Interest rate % Unemployment % GDP - QoQ % 2007 - Q1 ⟶ 2007 - Q2 ⟶ 2007 - Q3 ⟶ 2007 - Q4 ⟶ 603.00 1,238.00 713.00 1,558.00 7.00 7.00 7.00 7.00 4.24 -- -- -- 2.80 2.50 1.80 3.40 2008 - Q1 ⟶ 2008 - Q2 ⟶ 2008 - Q3 ⟶ 2008 - Q4 ⟶ 4,438.00 2,392.00 2,562.00 1,362.00 7.00 7.00 7.00 7.00 8.00 -- -- -- 0.60 1.00 0.90 0.10 2009 - Q1 ⟶ 2009 - Q2 ⟶ 2009 - Q3 ⟶ 2009 - Q4 ⟶ 1,956.00 2,471.00 1,512.00 1,542.00 4.50 4.25 4.25 4.25 4.12 -- -- -- -1.80 5.80 2.60 2.10

Table 5. Appendix 1, India.

India, being one of the largest emerging markets in the world and belonging to the BRICS-category was hit by the global financial crisis of 2007-2009 (Subbarao, 2009). In comparison with the U.S. and U.K. unemployment levels did not react as severely. The red line in figure 5 shows that the unemployment rate fluctuated between 4.24% in 2007 up to 8% in 2008. During Q1 of 2009 it decreased to 4.12% (Table 5) and later continued up until 2013 (Pletcher, 2020). Employment levels correlate with GDP, as employment levels drop, as does GDP due to productivity loss and reduced spending. From Q2 2007 to Q3 2008, GDP dropped from 2.5% growth to 0.9% (Table 5; Worldbank, 2020). Analysing the impact on FDI-flows shows a correlation between unemployment and GDP. This is due to India being a large global exporter due to its emerging market status, which saw exports drop during the global financial crisis of 2007-2009 due to depressed global growth and demand (Subbarao, 2009).

In comparison with the U.S. and the U.K, Indian commercial banks were not particularly affected by the crisis, as these did not have any significant exposure to underlying derivatives tied to the mortgage-market in the U.S. In contrast, some trading companies experienced

liquidity strains due to the reduced global growth, and put a strain on the liquidity of commercial banks. The Reserve Bank of India (RBI) extended credit-lines to commercial banks in order to ease these liquidity strains, in extension acting as a stimulatory measure (Mohanty, 2009). Interest rates were cut in 2009, in order to stimulate the economy as seen in figure 5. Monetary policy response was also based on the slashing of interest rates from 7% to 4.25% (Table 5; Subbarao, 2009).

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5.2.1.2 SARS-CoV-19 pandemic

India FDI ₹, k Million Interest rate % Unemployment % GDP - QoQ %

Q1 ⟶ 2,874.00 4.00 8.80 0.70

Q2 ⟶ −838.00 4.00 10.20 -25.20

Q3 ⟶ 2,412.00 4.00 6.70 --

Q4 ⟶ -- -- -- --

Table 6. Appendix 1, India.

The SARS-CoV-19 pandemic began in early 2020, and cast the entire world into a recession, comparable to the Great Recession of 2007-2009. Unemployment in India peaked at 10.2% in Q2 2020, and eventually fell to 6.7% in September (Table 6). India’s QoQ GDP-rates coincide with unemployment levels. From Q1 to Q2, GDP-growth rates stayed in the vicinity of 3-4% growth. But by the end of Q2, GDP-growth rate spiralled to -25.20% QoQ (Table 6). In Figure 5, the blue line represents FDI-flows, and the drop in flows is attributed to the reduced demand of export from India and its large manufacturing sector. Interestingly, aggregated FDI-flows surged in Q3, as a result of financial reforms by the Ministry of Commerce and Industry. Total inflows surged from $11 billion in Q1 to $32 billion in Q2 (Thehindu, 2020).

Monetary policy response in comparison with 2007-2009 consisted of slashes in interest-rates during 2020, and helicopter-money, essentially a rare-form of fiscal policy response consisting of handing money directly to the populus, in order to stimulate consumption (Das, 2020).

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5.2.2 South Africa

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S.A. FDI Rand, k

Million Interest rate % Unemployment % GDP - QoQ % 2007 - Q1 ⟶ 2007 - Q2 ⟶ 2007 - Q3 ⟶ 2007 - Q4 ⟶ 2,978.00 12,908.00 15,456.00 14,721.00 9.00 9.50 10.00 11.00 23.50 23.10 23.00 -- 6.70 3.30 4.80 5.80 2008 - Q1 ⟶ 2008 - Q2 ⟶ 2008 - Q3 ⟶ 2008 - Q4 ⟶ 44,388.00 12,163.00 17,059.00 2,469.00 11.00 12.00 12.00 11.50 23.20 22.60 22.80 21.50 1.70 5.00 1.00 -2.30 2009 - Q1 ⟶ 2009 - Q2 ⟶ 2009 - Q3 ⟶ 2009 - Q4 ⟶ 8,290.00 31,633.00 15,714.00 7,933.00 9.50 7.50 7.00 7.00 23.00 23.20 24.50 24.10 -6.10 -1.40 0.90 2.70

Table 7. Appendix 1, S.A.

South Africa, classified as a constituent of the BRICS-countries was affected by the Great Recession in 2008. Initially, South Africa lagged in time before it experienced a detrimental change to its macroeconomic data compared to other countries. GDP-QoQ during 2007-2008, fluctuated. Initially, the first four quarters of 2007 were all positive, and the first three quarters in 2008 presented positive GDP-QoQ growth as well. It wasn’t until Q4 in 2008 that South Africa showed a GDP-QoQ growth rate of -2.3%, in Q1 of 2009 -6.1% and in Q2, 2009 of -1.4%. Two consecutive quarters of negative GDP QoQ took a turn when GDP-growth QoQ in Q3 of 2009 when showed 0.9% (Table 7).

Prior to 2008, GDP-growth rates were stable, the unemployment rate dropped from 28% in 2004 to 21.5% in Q4 2008. Unemployment increased by 0.6% during the crisis of 2007-2009, from 23.5% to 24.1%. FDI-levels during the Great Recession fluctuated in inconsistent patterns, jumping from low to high as the crisis unfolded in South Africa (Mminele, 2009).

Policymakers battled the crisis by swiftly adopting and changing monetary policy due to increased inflationary forces. Interest rates were raised from 9% to 12% during the crisis of 2007-2008, as inflation levels increased, but decreased again in 2009 to 7% (Table 7). The South African Reserve Bank deemed it superfluous to adopt a quantitative easing program as other economies did. This change in interest rates can be viewed in figure 6. It reached its highest level in Q4 2008 and Q1-Q2 2009 (Macanda, 2009).

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5.2.2.2 SARS-CoV-19 pandemic

S.A. FDI Rand, k

Million Interest rate % Unemployment % GDP - QoQ % Q1 ⟶ 29,012.00 5.25-4.251 _30.10 _-1.80

Q2 ⟶ 17,363.00 3.75 23.30 -51.00

Q3 ⟶ 16,500.00 3.50 30.80 66.10

Q4 ⟶ -- -- -- --

Table 8. Appendix 1, S.A.

SARS-CoV-19 pandemic, in early 2020 wreaked havoc on international markets, with South Africa being no exception. South Africa had a substantial and large GDP-growth rate until 2020 after 2008, whilst unemployment simultaneously rose to 30.80% in Q3 of 2020 (Table 8;

Winning, 2020). South Africa was severely affected by the pandemic, and GDP was -1.80% in Q1 2020, then dropped to -51% in Q2 of 2020 and rose to 66.10% in Q3 of 2020. FDI-flows decreased slightly as the export to other countries decreased (UNDP, 2020)

The South African Reserve bank (SARB), unlike in 2008, initiated a quantitative easing program in Q1 of 2020. By Q2, the SARB held 30.8b in government bonds. Furthermore, the South African government launched a stimulus program of 500 billion rand in April as a part of a wider fiscal policy program. Moreover, in order to keep inflation within the target range of 4-6%, South Africa began importing oil which lowered the value of the South African rand versus other currencies (Smith, 2020).

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6 Analysis

6.1 Developed markets - Great recession of 2007-2009

6.1.1 The United States

The U.S. presented fluctuating albeit progressively lower FDI-flows throughout the crisis of 2007-2009. To understand these drops in flows, it is important to understand the ownership,

localization and internalization advantages of the OLI-paradigm (Dunning, 2000).

Competitive advantages, constituting the primary part of the ownership part, were in all likelihood skewed as a result of the economic aftermath of the recession: surges in

unemployment, reduced economic growth and reduced aggregate demand on a macro-level for the products or services offered by aggregated MNEs. If aggregate demand in an economy is reduced, it usually affects all sectors of an economy. Aggregated MNEs have therefore a lower incentive to conduct FDI abroad, as their primary revenue bases from home are shrunk as a result of the reduced demand for their product and services. Reduced outflows would therefore explain this phenomena. Likewise, inflows to the U.S. would be reduced due to a lower demand on the products and services of MNEs. This relationship is therefore bidirectional concerning outflows and inflows of aggregated FDI country-flows, based on the decision of aggregated MNEs undertake in terms of conducting foreign investment, with the decision being heavily influenced by the state of the economy, quantified by macroeconomic indicators (Brouthers, Brouthers & Werner, 1999; Dunning, 2000; Razin & Sadka, 2007, p. 5).

Moreover, the location advantages, as explained in the OLI-paradigm would reasonably explain why aggregated flows, capturing inflows and outflows steer towards or away from economies during expansionary or recessionary phases. Graphically, we can see that FDI-flows climbed in the U.S. prior to the onset of the Great Recession in 2007. A logical implication in regards to the decision-making of aggregated MNEs to conduct FDI would be that the economic environment presented favourable market dynamics, incentivising and steering capital flows towards the U.S. and simultaneously incentivising U.S. MNEs of international expansion as base-revenue streams within the U.S. are predictable, mitigating and reducing additional risk coming with foreign FDI (Brouthers, Brouthers & Werner, 1999; Dunning, 2000; Razin & Sadka, 2007, p. 6).

Internalization, and the organization and exploitation of core-efficiencies within the OLI-paradigm, can also explain the underlying decision-making processes of MNEs and the

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several ways, including acquiring foreign firms - via either mergers or acquisitions, a part of the reduced FDI-flows presented during 2007-2009 is due to MNEs’ decision-making processes identifying unfavourable market dynamics. Unfavourable is defined in the context of acquiring target firms, as the entire market dynamic of their specific micro-level sector they operate in is influenced by the recession, reducing expected revenue streams and increasing economic risk. Therefore, MNEs are disincentivized in organizing and exploiting their core-efficiencies via a number of ways, notwithstanding the presented entry mode process of M&A (Dunning, 2000). FDI-flows were steadily increasing in the U.S., as illustrated prior to the onset of the 2007-2009 crisis, and rebounded afterwards. This data-point alone points towards the oscillating nature of FDI-flows, mediated by the severity of an economic crisis and the amplitude of FDI-oscillations. In addition, the steady pace and the subsequent rebound in FDI-flows, prior to the crisis and in the recovery periods afterwards, indicates additional factors in the influence of FDI-flows. Market dynamics are impacted not only by macroeconomic factors, but also by the entirety of the political and legal sphere. The U.S. ranks low in corruption perception surveys, with an independent judiciary. Enforcement of property rights is strong, which means that property rights are well-protected. Politically, the country is a stable democratic republic with fair elections. Political and legal factors are important since they shape the market structure and governing market dynamics as a result of the institutional structures that are meant to protect and govern well-functioning market economies. Incentives to conduct FDI are therefore influenced by political stability and an absence of corruption (Hill & Hult, 2016, p. 40-43, 47).

Furthermore, monetary policy and fiscal policy action was swiftly implemented in order to battle the reduced aggregate demand in the U.S as a result of the recession. The reduction of interest-rates, as illustrated (Table 1), was sequential, occurring over an extended amount of time as the full ramifications of the crisis were not evident to policymakers immediately, and unfolded as the recession deepened. The severity of the recession was mitigated by the reflation of assets and fiscal policy stimulus (Norrestad, 2020). Unemployment levels started their slow descent as a part of these policy measures.

6.1.2 The United Kingdom

The U.K. experienced a similar trajectory to the U.S. as FDI-flows subsequently decreased, as its market and classification as a developed economy is almost identical to the U.S. Therefore, a detailed and thorough description of the U.K. in this section is avoided, and might at a glance seem unbalanced in presented size in comparison with other discussed markets, as going into

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depth increases the risk of superfluous and repetitive statements, describing events and measures taken of striking similarity to the U.S.

Unemployment surged in the U.K and it too fell into a recession, as evidenced by GDP-growth rates. Market dynamics in the U.K. as influenced by surrounding political and legal spheres are similar to the U.S. since both these economies are developed and experience low levels of corruption and stable political institutions.

Monetary and fiscal policy response equaled the one the U.S. saw with lowered interest rates and stimulating fiscal policy measures. FDI-figures saw fluctuations as well, differing from the U.S, but showed a marked depressed effect later in the crisis as evidenced in the illustration. Market structure and dynamics between the U.S. and the U.K. are similar, since they are both classified as developed markets, and subsequently display striking similarities in magnitude and handling of the crisis. The same underlying reasoning and logic as to why FDI-flows were affected in the U.S. is therefore applicable in this instance of analysing the U.K.

6.2 Emerging Markets - Great recession of 2007-2009

6.2.1 India

During the Great Recession of 2007-2009, Indian FDI-flows were not materially affected by the crisis, instead they showed occasional spikes as the crisis unfolded. Explanations for this

phenomena are numerous and explained by different focal points. First, the Indian financial sector did not have any meaningful exposure to any derivatives with underlying MBS or CDOs, therefore the robustness of the banking system in contrast to the U.S and U.K. financial sector was strong. Indian unemployment did not rise to the same extent as it did in the U.S. and U.K. While, arguably, the granularity of Indian unemployment data is different in comparison to the developed markets, as it is presented on a yearly level compared to a monthly, one clearly sees that the amplitude of rising unemployment was not as severe as in the developed markets. The Indian economy experienced a single negative GDP-quarter in 2009. Besides that, growth was slower, but not negative since the beginning of the global financial crisis. Therefore, one cannot say that the economy experienced a recession, as the definition of a recession is two consecutive quarters of negative GDP-growth. Despite this, monetary policy measures were taken, and interest rates reduced (Table 5).

Additional reasons, as to why the Indian economy did not experience the same severity of the recession as the developed markets lies in its market dynamics. India, classified as an emerging

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market and part of the BRICS-countries has lower GDP-per capita, resulting in lower wages. Therefore, it becomes an attractive destination for foreign companies, especially MNEs in establishing greenfield ventures or M&A activity, specialised in manufacturing.

Therefore, the lower wages and overall lower associated economic costs of conducting business in India, relative to developed markets, incentivises MNEs to establish a presence in India. Due to the gradual reduction of trade-barriers, spearheaded by organisations such as the WTO and the increased subsequent globalisation we find ourselves in today, competition becomes global. Incentives based on the ownership part of the OLI-paradigm, such as increased competitive advantages, are manifested in reduced cost-pressures on MNEs for conducting FDI in India. Likewise, location advantages are manifested by pooling rather immobile (factories e.g.) and other resources to India due to the ownership advantages enjoyed by low-cost pressures. Internalization is also present, since FDI into India, can be conducted in several ways, as previously mentioned (Brouthers, Brouthers & Werner, 1999; Dunning 2000).

FDI-outflows are not particularly prevalent due to the emerging market status of India at the time the Great Recession unfolded. Therefore, its FDI-flows are primarily oriented towards inflows. In other words, capital flows in the form of FDI-flows are pooled and steered towards India, and do not display the same degree of sensitivity and synchronicity towards economic cycles, in this case recessionary phases of economies (Table 5).

Analysing India from a PESTLE-perspective, and factoring in the political and legal sphere, it is clear that India ranks high in the corruption perceptions index, with a judiciary that is fraught with corruption. Despite this, India enjoys an unprecedented political stability, compared to other emerging markets, given its status as the world’s largest democracy. Therefore, the incentives to conduct FDI are outweighed by the reduced costs firms enjoy and the burgeoning growth

patterns India demonstrates as an emerging market and part of the BRICS-countries (Hill & Hult, 2016, p. 40-43, 47).

So, in other words, India enjoys strong FDI-flows on the basis of ample economic-growth in their domestic markets, as well as by aggregated MNEs pooling resources into the country for the refining of products and services that compete in the globalised economy.

6.2.2 South Africa

South Africa, akin to India, did not experience any material detrimental effects on its FDI-flows as seen in Figure 4. Highly fluctuating flows were equal to the example we saw with India.

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Although negative GDP-growth was recorded between Q4 of 2008 to Q2 of 2009, these reduced growth figures were not of the same magnitude as seen in the developed markets.

Similarities between South Africa and India are rather striking - both economies are emerging markets albeit with rather large disparities between unemployment levels. From a PESTLE-perspective, India had a baseline unemployment level significantly lower (around 5%) than S.A - hovering around 23% (Table 5 & 7). These disparities can be attributed to rather large wealth-gaps in South Africa that have resulted in high and persistent unemployment since the 1980s. Therefore, the relative impact the Great Recession had on unemployment levels in South Africa was negligible. Paradoxically, unemployment levels in South Africa declined until the latter part of the crisis, as we see in figure 4, and only started to increase during the second half of the crisis (Table 7).

The delayed detrimental effect on several macroeconomic indicators as a result of the Great Recession, notwithstanding unemployment but also the delayed monetary policy actions by the

South African Reserve Bank (SARB) in regards to lowering interest rates, suggests that the South

African economy did not have any material exposure to underlying assets tied to the subprime mortgage crisis (Macanda, 2009).

Therefore, we can identify a common denominator between South Africa and India - an absence of exposure towards deteriorating underlying credit-derivatives tied to the failing housing sector of the U.S. It seems that this isolated fact explains why FDI-flows, in both countries, were not significantly impacted by the crisis (Mminele, 2009).

Since the exposure was rather limited by South African and Indian banks, this would entail a scenario in which the financial sector of both countries was wholly intact compared to the deteriorating financial sectors in the U.S and the U.K. In other words, lending could continue in an interrupted manner as the underlying credit-risk of loans towards the entire S.A. economy was unaffected, due to the limited exposure of banks towards underlying mortgage-derivatives and non-existence of credit losses. Compounded by the fact that interest rates were reduced, it only propelled lending to an economy that was in and of itself unscathed by the detrimental effects of the financial crisis. This in turn steered loans towards sectors that were in comparable terms financially “sounder”, than comparable sectors in the U.S and the U.K.

While it is true that the same underlying dynamic of aggressive monetary stimulus was launched in the U.S and the U.K, the impact of the stimulus was compounded by the fact that risk-taking from banks in S.A. was not subject to the same degree of caution as it was in comparable

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developed markets. The developed markets saw systemic disruptions and increased caution in increased lending practices - even when interest rates were lowered.

Therefore, the effect of lowering interest rates in South Africa only fueled and increased the recovery, in a relative comparison to the U.K. and U.S. While this stream of thought is concerned with an orientation of the effects of these monetary policy actions in isolation, one cannot discount additional factors that explain the absence of detrimental effects on FDI-flows, that are in reality even intertwined with the absence of credit-exposure in the S.A. economy. Given the market structure and market dynamic of S.A. and its large presence of mining-sectors, it creates an economy that is susceptible to and attractive for foreign MNEs to conduct business in, due to inherently lower cost pressures as a result of reduced GDP-per capita (Table 7). In other words, MNEs are attracted to S.A. due equally similar reasons as they are attracted to India in terms of conduct FDI.

While this argument is modified and slightly more nuanced than a comparable example to India, due to overwhelming high levels of unemployment and associated social problems, such as crime, reducing S.A. as a destination for FDI-inflows, the characteristic traits of both India and S.A. are so close in comparison that one cannot completely reject this argument.

The mining sector in S.A. further compels a presence and influx of MNEs into S.A. as geological deposits are located in various geographies of the world, not contingent to the same extent on the political and legal stability of a country. Therefore, a situation emerges where MNEs are forced

to have a presence as an absence would significantly undercut their competitive position in the

globalised economy.

Consequently, aggregated MNE flows on an international scale are naturally manoeuvred towards S.A. due to Location advantages, as exemplified by the immobility of geological deposits. Synchronously, with ownership advantages in the OLI-paradigm, it is self-evident and likely that an absence of operations in S.A. might have skewed the competitive advantage of global MNEs within the mining-sector. Exploitation of core competencies would subsequently only be executed in geographies with significant geological deposits of minerals, and would again, adjacent to the aforementioned location and ownership advantages, result in

internalization advantages for MNEs (Brouthers, Brouthers & Werner, 1999; Dunning, 2000). Intuitively, as seen in figure 4, this central tenet would therefore reduce the sensitivity of S.A. FDI-flows and the potential negative impact of the Great Recession, as FDI-flows were mostly

Capital flows during times of crises: A study of 21st century economic crises and their impact on FDI-flows