There are two ways in which FDI acts as a transmission channel for economic shocks, depending on where the shock occurs: in the home country or the host - the foreign - country. First, shocks in a foreign investor’s home country may affect its financial position at home, and force it to cutback its activity in host countries as well.
Second, due to shocks in a host country, the value of a firm’s investments abroad may be affected. Consequently, that firm’s net worth at home is affected as well. Net worth, in turn, is related to financing costs, so it is obvious that a reduction of the value of foreign investments may reduce investments in the home country, because of higher costs.