The Role of Economic Policy Uncertainty in Outward Foreign Direct Investment
36 Pages Posted: 2 Nov 2021 Last revised: 21 Mar 2022
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: Suggested Citation