Does Uncertainty Always Reduce FDI? Lessons from Country and Sector-Specific Analyses

Yigitali Zokirov () and Craig R. Parsons
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Yigitali Zokirov: Yokohama National University
Craig R. Parsons: Yokohama National University

A chapter in Emerging Markets and Industrialized Countries in the New Wave of Globalization, 2025, pp 6-24 from Springer

Abstract: Abstract This study explores the impact of uncertainty on foreign direct investment inflows across 21 sectors—ranging from manufacturing to technology—using data from 2003 to 2020. Utilizing a Poisson pseudo-maximum likelihood model with dyadic country-pair fixed effects, we find that heightened uncertainty generally deters FDI, but its effects vary by sector and economic classification. While emerging economies face significant negative impacts, advanced economies may become more attractive during uncertain times. Sectors tied to global supply chains, like Automotive and Energy, show high sensitivity to uncertainty, whereas IT Services and Semiconductors may attract more investment. Additionally, an analysis of the 2018 US-China trade war reveals that uncertainty's adverse effects worsened post-war. Our findings highlight the necessity of understanding sectoral differences in FDI dynamics, offering important insights for policymakers aiming to encourage more stable investment.

Keywords: Economic Policy Uncertainty; Foreign Direct Investment; PPML; Sector specific analysis; Trade war; Uncertainty (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-032-04602-4_2

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DOI: 10.1007/978-3-032-04602-4_2

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