Economic Policy Uncertainty and China’s FDI Inflows: Moderating Effects of Financial Development and Political Stability

Liqiang Dong, Mohamad Helmi Bin Hidthiir and Mustazar Bin Mansur ()
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Liqiang Dong: Faculty of Economics and Management (FEP), Universiti Kebangsaan Malaysia (UKM), Bangi 43600, Malaysia
Mohamad Helmi Bin Hidthiir: School of Economics, Finance and Banking, Universiti Utara Malaysia (UUM), Sintok 06010, Malaysia
Mustazar Bin Mansur: Faculty of Economics and Management (FEP), Universiti Kebangsaan Malaysia (UKM), Bangi 43600, Malaysia

JRFM, 2025, vol. 18, issue 7, 1-22

Abstract: This paper investigates the impact of global EPU and China’s EPU on China’s FDI inflows, examining whether financial development and political stability moderate these relationships. Using panel data from 212 countries spanning 2009 to 2022, we first establish causal direction through Granger causality tests, then employ instrumental variable estimation to address endogeneity concerns, while conducting heterogeneity analysis across development levels and Belt and Road Initiative participation. We find that both global and domestic EPU significantly reduce China’s FDI inflows, with a 1% increase in China’s EPU leading to a 0.083% decrease in FDI inflows. However, political stability and financial development serve as effective moderators, reducing EPU’s negative impact by up to 60% and 70%, respectively. The effects vary substantially across investor countries: non-developed countries show ten times stronger sensitivity to EPU than developed countries, while Belt and Road Initiative countries demonstrate 86% lower sensitivity than non-BRI countries. This research advances EPU–FDI theory by demonstrating how institutional quality creates “policy buffers” against uncertainty and provides policymakers with evidence that strengthening political stability and financial development can maintain investor confidence during uncertain periods, while strategic international partnerships can insulate investment flows from policy volatility.

Keywords: foreign direct investment; economic policy uncertainty; financial development; political stability (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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