COVID-19 and China’s Foreign Direct Investment Inflow- Stress Tests Based on Extreme Gradient Boosting Model and Policy Implications

Abstract

Foreign direct investment (FDI) is essential to world economic growth, global industrial chain optimization, technology diffusion, and product innovation. This study identifies several macro-level factors affecting FDI inflow to China after discussing possible mechanisms through which COVID-19 influences FDI. Then, it tests three different stressful scenarios simulating the COVID-19 influence on China’s FDI inflow with a regression model estimated by extreme gradient boosting (XGBoost) in Python. Results show that the rampant COVID-19 pandemic and increasing global investment risks would have a substantial and negative impact not only on global FDI size, investment rules, and investment structure, but also on FDI inflow to China. Without effective measures being taken, from January 2020 to March 2022, losses in China’s annual FDI inflow could reach 5.71 percent to 11.28 percent, but the country’s actual annual FDI inflow is much higher. The extraordinary measures adopted by the Chinese government include preventing pandemic measures that are prompt and effective as well as targeted macroeconomic regulation policies. They make a rapid recovery or even improvement in China’s economic fundamentals, which in turn enhance China’s attractiveness to FDI and the FDI size, more than offsetting the negative effect of COVID-19 on FDI inflow to China. Finally, this paper proposes several countermeasures in macro-economic regulation and industrial policy adjustment to prevent and mitigate the negative influence of COVID-19 on FDI.