COVID-19 stringency measures and foreign investment: An early assessment

This paper investigates the evolution of foreign investment in the immediate aftermath of the implementation of COVID-19 government stringency measures. The average stringency index is not correlated with inward investment positions. However, after removing country fixed-effect and controlling for the severity of the outbreak spread, the within-country standard deviation of the stringency index is positively and significantly correlated with inward portfolio investments, at the end of the first quarter of 2020. At the end of the second quarter, the same dispersion measure is instead not associated with a significant change in inward investment. We interpret this evidence as follows. Foreign portfolio investments, typically more volatile and reactive than foreign direct ones, are more responsive, at the end of the first quarter, to governments' prompt interventions than to gradual ones, thus suggesting that the former policies are perceived as a more serious commitment to stem the spread of COVID-19. In the second quarter, instead, the standard deviation of the index captures the abrupt retreat of the containment measures, together with the timely adoption of policies, thus becoming less informative for foreign investors.