Cross-border Investments and Uncertainty: Firm-level Evidence
51 Pages Posted: 28 May 2020
Date Written: April 2020
This paper studies the impact of uncertainty on cross-border investments. We build a data set of firm-level outward Foreign Direct Investments between 2000 and 2015. We create a time and country varying measure of uncertainty based on the dispersion of idiosyncratic investment returns. An increase in uncertainty delays cross-border flows to the affected country. Yet, this average e_ect hides strong heterogeneity. Firms with low ex-ante performance durably reduce their foreign investments. Meanwhile high-performing firms increase their investments after the initial shock. We interpret these results as the evidence of a cleansing effect of uncertainty shocks among multinational firms in the presence of financial frictions.
Keywords: Uncertainty; Asymmetric Uncertainty; FDI Flows; FDI Returns; Volatility; Multinational Firms
JEL Classification: D81; F23; G10; G15
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