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Trade Policy Uncertainty and its Effect on Foreign Direct Investment: Evidence from Mexico

Author

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  • Cebreros Alfonso
  • Salcedo Alejandrina
  • Chiquiar Daniel
  • Heffner-Rodríguez Aldo

Abstract

This paper investigates whether "trade policy uncertainty" (TPU), even absent changes in actual policy, may have an adverse effect on foreign direct investment. The paper focuses on the case of Mexico, where we observe a plausibly sharp and exogenous increase in TPU vis-à-vis a large trading partner beginning in the second half of 2016. To test this hypothesis, we use data from Google Trends to construct a TPU index and argue that this index adequately captures both time series and cross-sectional variation in TPU across states in Mexico. We exploit this variation to identify the effect of increased uncertainty on FDI flows. We find that the increase in TPU was associated with a negative effect on FDI inflows, with the effect being driven by the negative impact that TPU had on FDI in export oriented states.

Suggested Citation

  • Cebreros Alfonso & Salcedo Alejandrina & Chiquiar Daniel & Heffner-Rodríguez Aldo, 2020. "Trade Policy Uncertainty and its Effect on Foreign Direct Investment: Evidence from Mexico," Working Papers 2020-14, Banco de México.
    • Handle: RePEc:bdm:wpaper:2020-14
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    Cited by:

    1. Bush, Georgia & López Noria, Gabriela, 2021. "Uncertainty and exchange rate volatility: Evidence from Mexico," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 704-722.
    2. Salgado Alfredo & Trujillo Alejandro, 2023. "Growth at Risk and Uncertainty: Evidence from Mexico," Working Papers 2023-08, Banco de México.
    3. Hernández Vega Marco A., 2021. "The Nonlinear Effect of Uncertainty in Portfolio Flows to Mexico," Working Papers 2021-11, Banco de México.
    4. Arnab K. Basu & Nancy H. Chau, 2022. "Offshoring and labor markets in developing countries," IZA World of Labor, Institute of Labor Economics (IZA), pages 499-499, September.
    5. Mario Canales & Bernabe Lopez-Martin, 2021. "Uncertainty, Risk, and Price-Setting: Evidence from CPI Microdata," Working Papers Central Bank of Chile 908, Central Bank of Chile.
    6. André Marine Charlotte & Medina Espidio Sebastián, 2022. "Optimal Robust Monetary Policy in a Small Open Economy," Working Papers 2022-17, Banco de México.

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    More about this item

    Keywords

    trade policy uncertainty; foreign direct investment; real options;
    All these keywords.

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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