Cross-border investments and uncertainty: Firm-level evidence

Abstract

We study the impact of uncertainty on cross-border investments. We build a novel country and time-varying proxy for uncertainty based on FDI returns of French Multinational Firms. A rise in uncertainty has a direct negative short-term impact on cross-border investment flows to the affected country. Multinational firms with low ex-ante performance never recover while after a rise in uncertainty while higher performing multinational firms over compensate in the following periods. A model based on financial frictions explain the effect of uncertainty shocks on foreign investments and the heterogeneous responses of multinational firms. Cross-border Investments and Uncertainty Firm-level Evidence*

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