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Does policy uncertainty travel across borders? Evidence from MNC subsidiary investment decisions

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  • Zhou, Xi
  • Xiao, Min
  • Wu, Huiying
  • You, Jiaxing

Abstract

Using a large-scale proprietary data set from China, we examine the cross-border transmission of policy uncertainty within multinational corporations (MNCs). Our results show that policy uncertainty in MNCs’ home countries negatively affects the capital investment of their foreign subsidiaries. Our analyses of cross-sectional heterogeneity reveal that the effect is strengthened by subsidiary-level investment irreversibility and the dependence of subsidiaries on parent firms, and weakened by bilateral meetings and psychic closeness between the home and host countries. Together these findings suggest that policy uncertainty travels across borders and has a spillover effect on foreign subsidiary investment.

Suggested Citation

  • Zhou, Xi & Xiao, Min & Wu, Huiying & You, Jiaxing, 2024. "Does policy uncertainty travel across borders? Evidence from MNC subsidiary investment decisions," Journal of Banking & Finance, Elsevier, vol. 163(C).
    • Handle: RePEc:eee:jbfina:v:163:y:2024:i:c:s0378426624001122
    DOI: 10.1016/j.jbankfin.2024.107195
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    More about this item

    Keywords

    Policy uncertainty; Multinational corporation; Capital investment; Foreign subsidiary; Within-MNC transmission;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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