Policy Uncertainty and Foreign Direct Investment

Sangyup Choi, Davide Furceri and Chansik Yoon ()
Additional contact information
Chansik Yoon: Princeton University

No GRU_2020_007, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: While foreign direct investment (FDI) is known to be the most stable type of international capital flows, it may be particularly susceptible to heightened uncertainty because of its high fixed costs. We investigate the effect of domestic policy uncertainty on FDI inflows into 16 host countries using the OECD bilateral FDI panel dataset and the Economic Policy Uncertainty (EPU) index from 1985 to 2013. The bilateral structure of the data enables us to disentangle pull factors of FDI from its push factors, thereby obtaining a cleaner causal identification of the higher domestic policy uncertainty effect. To alleviate remaining endogeneity concerns, we use the timing of “exogenous” elections as an instrument. We find that domestic policy uncertainty in a host country robustly reduces the FDI inflows, with the effect being larger in countries with less financial development.

Keywords: Economic policy uncertainty; FDI inflows; Elections; Financial development (search for similar items in EconPapers)
JEL-codes: F21 F32 F42 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-04-12
New Economics Papers: this item is included in nep-int and nep-opm
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Policy uncertainty and foreign direct investment (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cth:wpaper:gru_2020_007

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