Foreign direct investment under uncertainty evidence from a large panel of countries

Abstract

We examine the effect of uncertainty on foreign direct investment inflows for advanced, emerging market and developing countries over a 25‐year long (pre‐Covid) sample. Using a push‐pull framework, and controlling for both global and local factors, we find policy uncertainty has discernable and significant effects on inflows, varying in strength and direction between different groups of countries. Moreover, it is not host country uncertainty that seems to matter the most, but rather global uncertainty. Additionally, we find that high levels of uncertainty matter disproportionately. Finally, financial openness accentuates the impact of uncertainty for emerging market and developing countries.

Multinational Firms and Economic Integration: The Role of Global Uncertainty

“…The negative relationship between FDI flows and uncertainty is now widely documented in the literature. As FDI flows are closely related to the political and institutional uncertainty of the host country [33], as well as because of the measurement problem of uncertainty [39], most studies have focused on identifying the relationship between FDI flows and political uncertainty or institutional quality. Julio and Yook [23], among others, highlight that the FDI flows are significantly reduced by the political uncertainty during the election periods.…”

“…See, for example, Wei [44], Buchanan et al [45], Benassy-Quere et al [46], and Daude and Stein [47]. Though previous literature has mainly focused on the country-specific uncertainty and FDI inflows, recent work by Jardet et al [39] also highlights that FDI flows are influenced by global uncertainty rather than host countryspecific uncertainty. This paper contributes to the literature by theoretically analyzing the links between global uncertainty and FDI flows and the resulting global market structure.…”

“…In such an environment, multinational firms' investment decisions might be better explained by global uncertainty rather than country-specific uncertainty, since, in contrast to national firms, multinational firms operate their affiliates in many countries and the locations are strategically and closely interrelated. Related to this issue, for example, a recent work by Jardet et al [39] finds an interesting result. Using panel data of 129 countries over 1995-2019 (pre-COVID-19), they find that inward FDI is influenced by global uncertainty rather than host country uncertainty: higher global uncertainty significantly decreases inward FDI, while the effect of the host country uncertainty is not statistically significant.…”