Foreign Investment in Times of COVID-19: How Strong Is the Flight to Advanced Economies?

This paper investigates the extent of the flight to quality effect, in the aftermath of the COVID outbreak, towards advanced economies. Within a generalized decline in foreign investment, we observe that advanced countries, with higher GDP per capita, belonging to the G7 group, or to the Euro area are significantly less severly hit by the pandemic than emerging and developing countries. In particular, comparing the growth in foreign liabilities at the end of the first and second quarter of 2020, the wedge between advanced economies and emerging countries is about 4%, and is even larger for G7 countries. These findings are particularly strong and systematic in the first quarter, and survive to the inclusion of COVID government stringency measures, alternative measures of pandemics severity, and different sample specifications.