The Role of Economic Policy Uncertainty in Outward Foreign Direct Investment

36 Pages Posted: 2 Nov 2021 Last revised: 21 Mar 2022

See all articles by Yuhyeon Bak

Yuhyeon Bak

Ulsan National Institute of Science and Technology (UNIST)

Saiah Lee

Ulsan National Institute of Science and Technology (UNIST); Seoul National University

Date Written: March 20, 2022

Abstract

This paper investigates the effects of relative economic policy uncertainty (EPU) on outward foreign direct investment (FDI) from South Korea to 21 host countries. We develop a theoretical model for the relationship between uncertainty and outward FDI and estimate the dynamic effects of the relative EPU on FDI outflows using the dynamic panel and panel VAR models. We find that a relatively high EPU in the home country significantly contributes to increased outward FDI. When a one-percent relative EPU shock occurs, FDI outflow peaks in the fifth quarter, with the accumulated response of FDI outflows rising approximately 1.43%, then gradually decreasing over the next quarters.

Keywords: Economic Policy Uncertainty, Foreign Direct Investment, FDI Determinants

JEL Classification: F21, D81

Suggested Citation

Bak, Yuhyeon and Lee, Saiah, The Role of Economic Policy Uncertainty in Outward Foreign Direct Investment (March 20, 2022). Available at SSRN: https://ssrn.com/abstract=3952708 or http://dx.doi.org/10.2139/ssrn.3952708

Yuhyeon Bak

Ulsan National Institute of Science and Technology (UNIST) ( email )

gil 50
Ulsan, 689-798
Korea, Republic of (South Korea)

Saiah Lee (Contact Author)

Ulsan National Institute of Science and Technology (UNIST) ( email )

50 UNIST-gil, Ulju-gun
Ulsan, 44919
+82-52-217-3202 (Phone)

HOME PAGE: http://saiahlee.unist.ac.kr

Seoul National University

Kwanak-gu
Seoul, 151-742

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