Policy uncertainty and foreign direct investment

Sangyup Choi, Davide Furceri, Chansik Yoon

Research output: Contribution to journalArticle

Abstract

While foreign direct investment (FDI) is known to be the most stable type of international capital flows, it may be particularly susceptible to heightened uncertainty because of its high fixed costs. We investigate the effect of domestic policy uncertainty on FDI inflows into 16 host countries using the OECD bilateral FDI panel data set and the economic policy uncertainty index from 1985 to 2013. The bilateral structure of the data enables us to disentangle pull factors of FDI from its push factors, thereby obtaining a cleaner causal identification of the higher domestic policy uncertainty effect. To alleviate remaining endogeneity concerns, we use the timing of “exogenous” elections as an instrument. We find that domestic policy uncertainty in a host country robustly reduces the FDI inflows, with the effect being larger in countries with less financial development.

Original languageEnglish
JournalReview of International Economics
DOIs
Publication statusAccepted/In press - 2020

All Science Journal Classification (ASJC) codes

  • Geography, Planning and Development
  • Development

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