Political Uncertainty, FDI, and Trade In Intermediate Goods: Evidence From Ukrainian Firms

54 Pages Posted: 10 Jun 2017 Last revised: 18 Feb 2018

See all articles by Oleksandr Shepotylo

Oleksandr Shepotylo

Aston University - Aston Business School

Jan Stuckatz

London School of Economics & Political Science (LSE)

Date Written: February 15, 2018

Abstract

In this paper, we introduce a new method to measure uncertainty using quantitative text analysis and explore the effects of uncertainty on firm performance. We extend a theoretical model with heterogeneous firms and sunk investments to derive hypotheses about the impact of trade policy uncertainty (TPU) on firm-specific investment and firm’s decision to trade intermediate goods. We look at Ukraine’s trade relations with EU and Russia to measure TPU and to test our predictions. Ukrainian firms faced considerable uncertainty with regards to two mutually exclusive trade policies: the conclusion of a free trade agreement with the European Union (EU FTA) or a customs union with Russia (RU CU). Using firm-product level data of Ukrainian manufacturing firms between 2003 and 2013, we find a substantive increase in firm level FDI inflows and imported intermediate goods from EU countries and a decrease in FDI from the Customs Union, once uncertainty with regards to the EU FTA is reduced. Moreover, more protected goods respond stronger to a reduction in TPU.

The novel measure of uncertainty can be easily applied to other cases where governments face multiple mutually exclusive policy options.

Keywords: trade policy, uncertainty, machine learning, intermediate inputs, FDI

JEL Classification: C55, D81, F12

Suggested Citation

Shepotylo, Oleksandr and Stuckatz, Jan, Political Uncertainty, FDI, and Trade In Intermediate Goods: Evidence From Ukrainian Firms (February 15, 2018). Available at SSRN: https://ssrn.com/abstract=2983695 or http://dx.doi.org/10.2139/ssrn.2983695

Oleksandr Shepotylo (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

Jan Stuckatz

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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