When to Go Abroad: Economic Policy Uncertainty and Chinese Firms’ Overseas Investment

Abstract

We study how economic policy uncertainty (EPU) influences firms’ overseas investment in Chinese listed companies. We find a significant negative relationship between EPU and firms’ overseas investment after controlling for firm characteristics and macroeconomic variables. Chinese firms seem to reduce their overseas investment on fixed income securities when facing a domestic policy uncertainty. The negative relationship is more pronounced for financially constrained firms relying on government subsidies and have low overseas revenues and SOEs. Firms located in high marketization regions can mitigate the negative effect of EPU on firms’ overseas investment. Our results remain significant when considering endogeneity problems. We contribute to the literature focusing on the interaction between EPU and corporate investment.

Keywords: Economic policy uncertainty, Overseas investment, China

JEL Classification: G18. G30, G32