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Economic policy uncertainty and foreign direct investment: Evidence from China

Author

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  • Gao, Han
  • Chen, Wenbin
  • Li, Jie
  • Zhou, Tianhang

Abstract

This paper examines the influence of economic policy uncertainty (EPU) on foreign direct investment (FDI). By utilizing a comprehensive dataset spanning 264 Chinese cities from 2005 to 2014, we uncover a negative relationship between EPU and FDI inflows. In addition, through heterogeneity tests, we demonstrate that this effect is more pronounced in cities characterized by a higher degree of marketization, stronger financial development, and a larger proportion of industrial production. Moreover, we observe that FDI exhibits greater sensitivity to EPU fluctuations following the 2008 Global Financial Crisis. To provide an explanation for these findings, we propose an open-economy model incorporating uncertainty.

Suggested Citation

  • Gao, Han & Chen, Wenbin & Li, Jie & Zhou, Tianhang, 2024. "Economic policy uncertainty and foreign direct investment: Evidence from China," Structural Change and Economic Dynamics, Elsevier, vol. 70(C), pages 178-191.
    • Handle: RePEc:eee:streco:v:70:y:2024:i:c:p:178-191
    DOI: 10.1016/j.strueco.2024.01.014
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    More about this item

    Keywords

    Uncertainty; Economic policy; Foreign direct investment;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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