How economic policy uncertainty affects foreign direct investment inflows: implications for the post-Covid-19 pandemic period
International Journal of Social Economics
ISSN: 0306-8293
Article publication date: 25 July 2023
Issue publication date: 7 February 2024
Abstract
Purpose
This study investigates the impact of economic policy uncertainty (EPU) on the inflows of foreign direct investment (FDI), specifically focusing on two components of FDI: greenfield investment and cross-border mergers and acquisitions (M&As). The objective is to analyze how EPU influences these two types of FDI differently. It further investigates how this impact varies during the Covid-19 pandemic.
Design/methodology/approach
Data were collected from various sources such as the United Nations Conference on Trade and Development (UNCTAD), Policy uncertainty index and the World Bank database to create a sample covering 213 countries from 2003 to 2020. The research objective was accomplished by utilizing the panel ordinary least squares (OLS) with fixed effects estimator.
Findings
The results demonstrate that countries that experience more EPU observe a decrease in FDI inflows. The authors also observe that FDI inflows have reduced due to the Covid-19 pandemic. Furthermore, the findings show that the impact of EPU is different between two components of FDI during the Covid-19 period. Specifically, the authors find that when uncertainty is trigged by the health crisis, there is an increase in FDI inflows in the form of cross-border M&As only. One possible reason is that cross-border M&As investors may take advantage of institutional quality (such as corruption) as an “efficient grease” to quickly expedite the entry process, which ultimately leads to a rise in cross-border M&As investment.
Originality/value
Overall, the study attempts to demonstrate empirical evidence about how EPU affects FDI inflows with an up-to-date dataset. In addition, the authors illustrate the significance of breaking down total FDI inflows into two sub-categories when examining the relationship between EPU and FDI. Third, the authors prove that the influence of EPU on FDI inflows differ significantly among different types of FDI components.
Peer review
The peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-02-2023-0114
Keywords
Acknowledgements
Funding: This research is funded by National Economics University, Vietnam.
Citation
Phan, N.H., Bui, V.D. and Nguyen, L.T.Q. (2024), "How economic policy uncertainty affects foreign direct investment inflows: implications for the post-Covid-19 pandemic period", International Journal of Social Economics, Vol. 51 No. 2, pp. 282-296. https://doi.org/10.1108/IJSE-02-2023-0114
Publisher
:Emerald Publishing Limited
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