Policy Uncertainty and Foreign Direct Investment

47 Pages Posted: 19 Feb 2021

See all articles by Sangyup Choi

Sangyup Choi

Yonsei University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Davide Furceri

International Monetary Fund (IMF)

Chansik Yoon

Princeton University

Date Written: July 21, 2020

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: Policy uncertainty, FDI inflows, Elections, Financial development

JEL Classification: F21, F32, F42

Suggested Citation

Choi, Sangyup and Furceri, Davide and Yoon, Chansik, Policy Uncertainty and Foreign Direct Investment (July 21, 2020). Available at SSRN: https://ssrn.com/abstract=3752479 or http://dx.doi.org/10.2139/ssrn.3752479

Sangyup Choi (Contact Author)

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Davide Furceri

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Chansik Yoon

Princeton University ( email )

Princeton, NJ
United States

HOME PAGE: http://sites.google.com/view/chansikyoon

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