“Foreign Direct Investment under Uncertainty”

From the conclusion to NBER WP No 29687  (paper), coauthored with Caroline Jardet and Cristina Jude (both Banque de France):

FDI flows have been particularly weak in the years preceding the pandemic, while traditional drivers like growth or historically low interest rates should have been supportive of a stronger dynamic. This suggests that structural factors beyond those usually found to drive FDI inflows, such as the increased economic uncertainty in the aftermath of the GFC, may have deterred FDI inflows. While there is an enormous extant literature analyzing the empirical determinants FDI, the empirical analysis of uncertainty’s impact is relatively small, partly explained by the lack of consistent cross-country measures of policy uncertainty.

In this paper, we examine the role of uncertainty in driving FDI inflows in a heterogeneous sample of advanced, emerging market and developing countries over a 25 year long pre-Covid period sample from 1995 to 2019. By relying on a push-pull framework, we control for both host country as well as global uncertainty. Stratifying the sample according the development levels allows us to discern effect of different strength and directions among the country groups.

We thus find that it is not host country uncertainty that seems to matter the most for FDI inflows, but rather global uncertainty. Domestic economic and political uncertainty is usually statistically insignificant for FDI inflows. These results hold despite variations in the global and host country measures of uncertainty.

For emerging countries, and in certain conditions, host countries uncertainty seems to also have a negative effect on FDI flows, but to a lesser extent compared to global uncertainty. Domestic uncertainty does not seem to be an important driver of FDI inflows in advanced or developing economies.

We also highlight a flight-for-safety phenomenon when global uncertainty is high or persistent, thus leading foreign investors to redirect FDI to advanced countries, perceived as safe heavens.

Finally, our results suggest that higher financial openness reinforces the negative impact of global uncertainty, which also corroborates the fact that the most affected flows are actually the cross border mergers and acquisitions and not greenfield FDI.

The results are based on a panel data set, but one key finding is illustrated by this time series plot.

Figure 1: Inward FDI as a share of GDP, ex.-financial centers, % (blue, left scale), and Global World Uncertainty Index (red, right scale). Source: JJC (Figure 3), Ahir, Bloom and Furceri.

What’s one real-world implication? In our baseline specification:

Using the group-specific point estimates, we can consider what FDI inflows would have been had the level of global uncertainty from 2015 to 2019 been at 2014 levels (that is 0.18 instead of 0.41).

Our estimates imply a large impact on FDI inflows, perhaps unsurprisingly because of the large postulated change in global uncertainty levels. FDI inflows rise by about a percentage point of GDP for emerging market economies, and by about 1.5 percentage points for advanced economies.

The ungated version of the paper is here.


55 thoughts on ““Foreign Direct Investment under Uncertainty”

  1. Macroduck

    U.S. residents may have a harder time distinguishing domestic from global uncertainty, especially in recent years, because U.S. policy has been a big part of global uncertainty. It is easy to conflate “our policy” with domestic policy in casual thought.

    1. pgl

      I was sort of thinking of the same thing. The disruptions to world trade from the Trump trade war likely had a negative impact on FDI. Maybe some smart group of economists is writing a paper on this as we speak. Of course that 2017 tax cut for the rich was explicitly trying to tilt the incentives for FDI even if some of the provisions were clearly export subsidies that violate WTO rules.

    1. Menzie Chinn Post author

      JohnH: Data in the analysis is through 2019 – we didn’t want to include the effects of the pandemic (but did want to include the Trump war).

      Would it kill you to read the abstract?

      As I have noted elsewhere, global policy uncertainty (as measured by BBD measure) is way down post-Trump.

      1. pgl

        “Would it kill you to read the abstract?”

        JohnH believes that all he needs to do is read the title of something so why would he bother reading the abstract?

      2. macroduck

        Wouldn’t kill him, but it would make it harder to moan and complain. Which is why he won’t read the abstract. Moaning and complaining is all Johnny wants to do.

    2. pgl

      The very 1st sentence of the abstract:

      “We examine the effect of uncertainty on foreign direct investment inflows for a heterogeneous sample of advanced, emerging market and developing countries over a 25 year long (pre-Covid) sample.”

      Come on dude – we know you cannot bother reading an entire paper but you didn’t read even the FIRST sentence of the abstract? Wow!

    3. pgl

      “The robust growth came as China’s long-term and sound economic fundamental, and constantly improving business environment retained an appeal to foreign capital, said Zhang Jianping, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the commerce ministry.”

      I guess this is the message ltr has been promoting like forever. But oh my – this is not going to make Princeton Steve’s day. So companies like GM, Ford, Adidas, etc. will own affiliates in the PRC. Something tells me that they will exploit transfer pricing to divert profits to tax havens. Of the Chinese income tax authorities are rather tough cookies.

  2. rsm

    Since financial flows make the FDI statistic a rounding error, are you all missing the forest for the trees?

  3. rsm

    Menzie, is it hard for you to see that supply chains are just payment chains in reverse?

    If you look at BIS statistics, will you find daily average turnovers of $6.5 trillion in OTC derivatives, including $2.5 trillion in daily FX instruments?

    Where do you think the $600 billion or so in real trade flows comes from, labor income?

    Is it too hard to imagine a financial system that creates the deposits used to both fund and purchase most real goods? And in a panic, can you imagine a Fed put that implicitly backstops all that private money creation?

    1. macroduck

      Yes, finance matters. That has been understood perhaps since before the advent of money, so congratulations on your big discovery.

      Beyond that, you’re completely full of hooey. ( Menzie, is “hooey” within guidelines?) Finance for goods production is generally very simple. Bank loans, debt instruments, discounting receivables – nothing much new since the Fuggers. If you don’t know that, you don’t know enough to have an opinion.

      Which means your latest excuse for pestering Menzie is just as baseless as your prior excuses.

  4. Moses Herzog

    It must be cool to badmouth a infrastructure bill as an expensive waste, then immediately turn around and brag about what it did for your state, as if you had done it. Kind of like prodding your wife to buy a scrumptious lemon and poppy-seed cake because she got a pay raise at her job, telling her to bake it, then telling her she’s going to be a disgusting fatty no one wants to look at if she eats it.

    That’s how Republicans work the public. And idiots like Pelosi think the answer to that is, go on a late night talk show and tell people you eat premium ice cream. The woman is a master of ceremonies. My question to those proficient in Pelosi apologetics on this blog is, do you think there’s a more intelligent way for the Speaker of the House to activate the Democrat party base?? Or are you that dumb, you think that’s “good politics”??

    1. Barkley Rosser


      Oh my, you are coming off as a caricature of yourself here. Yes, we know that you have this weird obsession with the infamous incident when Pelosi bragged about eating premium ice cream. Yeah, that was kind of embarrassing. But, hey, that happened in April 2020, nearly two years ago.

      So, what on eaeth does that have to do with any response she might have to hypocritical Republicans claiming credit for the infrastructure bill, passed in late 2021 thanks substantially to capable efforts by Nancy Pelosi? Do you want to explain why you are bringing up this completely out of date and irrelevant matter in this context? Just how out of it are you?

      1. Barkley Rosser

        BTW, Moses,

        I am on her case now, and I think you should be as well. It is over this matter of her defending the right of members of Congress to freely buy and sell stocks, when many of us think they should put them in blind trusts. That is mostly a GOP position, but here she is pushing it when she and her husband clearly have a personal interest in this. This is actually pretty bad, in contrast to that silly business about the ice cream that nearly everybody in the known universe has largely forgotten except for you.

          1. Moses Herzog

            @ Barkley Rosser
            As soon as you learn how to copy/paste a link on the internet, I want you to ponder the age old philosophical question “Can married men be sexists??”. Then, after that, I’d like you to look up facetious humor, as it relates to people exhibiting behaviors (i.e. legit criticisms of females based in reality) accusing those who do the same thing as “sexist” but when they themselves do the same thing, they regard their own criticisms of that same female as “sweetness and light from on high”.

            I’d also like to posit something to “the great void” reading out there, do they think treating women like children (“shielding” women from criticism to give themselves a false sense of either “broad mindedness” and/or “chivalry”) is in fact complimentary/cohesive to a view of women being strong-minded independent adults?? Or is it just a cheap way to win an argument or feel superior??

          2. Moses Herzog

            I do declare, some people out there who view themselves as “standard bearers” for gender equality, would have adult women running to their bedrooms like a 12 year old to cry into their pillow every time they read a criticism online or heard a criticism at the office. Maybe Claudia Sahm and people who forgot to take their meds for the last 2 months think how that’s how you make women strong and build up some healthy calluses. I do not.

    1. Moses Herzog

      Good to see you admitting that last part about China. Sometimes it’s hard for less developed nations to accept their current role.

      Excited to see what the China sea carriers will look like though. I used to love bath toys as a child. I can hear Ernie on Sesame Street singing in my head now: “Rubber ducky, you’re the one, you make bathing lots of fun……”

    2. ltr

      Interestingly, China makes actual ships, lots of actual ocean- and space-going ships, as well as making lovely toy duck-boats:


      January 22, 2022

      China remains world’s leading shipbuilder in 2021


      January 26, 2022

      China completes health check on BDS satellite constellation

  5. Moses Herzog

    I’m looking forward to this documentary being picked up to the inventory of my local public library. I recommend those who can to watch it whenever it becomes available to them. Hopefully it will also be offered in DVD form and not just streaming:

    I guess these rules Disney shoves down workers’ throats, similar to what Amazon executive “leadership” does to its workers, must be part of the current “labor shortage” suffered by American corporations. They’re just “totally at a loss” to imagine ways to attract workers, never mind dissuade them.

    1. Gregory Bott

      Dude, there is a reason Biden is increasing in popularity within the Rustbelt(in Ohio, it has increased 5 points within the last 2 months). His Trade Warrior/pro capital investment stance is popular there. Republicans tried this in 2006-8. Didn’t exactly work.

      1. Moses Herzog

        They tried being pro-union?? They tried pushing Disney to pay workers’ benefits?? I’d love to see the links to that.

  6. ltr


    January 25, 2022

    Chinese mainland reports 45 new COVID-19 cases

    The Chinese mainland recorded 45 confirmed COVID-19 cases on Monday, with 18 linked to local transmissions and 27 from overseas, data from the National Health Commission showed on Tuesday.

    A total of 43 new asymptomatic cases were also recorded, and 747 asymptomatic patients remain under medical observation.

    Confirmed cases on the Chinese mainland now total 105,705, with the death toll remaining unchanged at 4,636 since January last year.

    Chinese mainland new locally transmitted cases


    Chinese mainland new imported cases


    Chinese mainland new asymptomatic cases


      1. ltr

        Forgive the careless omission of a word:

        China has administered over 2.97 [billion] vaccine doses on the mainland…

        [ The inactivated vaccines which are so widely used by the Chinese, even though they have developed and tested and have ready other vaccine types, seem to be especially effective. Since Chinese mainland administration of vaccines began on an emergency basis in June 2020, there have only been 2 coronavirus deaths. There has been no coronavirus death on the Chinese mainland since January 2021. ]

        1. ltr

          Clarifying and simplifying:

          There are a range of coronavirus vaccines approved by the World Health Organization and used internationally. All of the WHO approved vaccines currently used seem to be effective. So too, the WHO approved Chinese inactivated virus vaccines seem to be effective.

      2. Anonymous

        where do i egt that shot!

        why has the fda and who grabbed on to the superior vaccine china dispenses?

  7. pgl


    The WSJ reports that while companies that use semiconductor chips in manufacturer tended to have 40 days inventory back in 2019 but now have only 5 day inventory. Now Bruce “no relationship to Robert” Hall used to tell us that low days inventory was a prudent Just in Time inventory policy. Of course everyone with a brain sees this as an alarming statistic and a clear call in increase the capacity to produce more semiconductor manufacturing capacity.

    1. ltr


      January 25, 2022

      Commerce Dept. Survey Uncovers ‘Alarming’ Chip Shortages
      Increased demand for the semiconductors that power cars, electronics and electrical grids have stoked inflation and could cause more factory shutdowns in the United States.
      By Ana Swanson and Catie Edmondson

      WASHINGTON — The United States is facing an “alarming” shortage of semiconductors, a government survey of more than 150 companies that make and buy chips found; the situation is threatening American factory production and helping to fuel inflation, Gina M. Raimondo, the commerce secretary, said in an interview on Monday….

      [ This is puzzling to me, given the lateness in identifying and describing the problem, and a failure to analyze and address the problem from an international perspective. ]

  8. Moses Herzog

    My roughly 3 years old POS LG external disc drive broke down about a week ago. I just picked up the ASUS (a much better brand than LG) for about $33 before tax. I drove clear across town for the damned ASUS over the other POS brands like LG. As I install this fine piece of ASUS machinery, and slam dunk the LG drive into the garbage Clyde Drexler style, I can hear the iconic words of Oscar Goldman in my head:
    [dramatic tympani beat in background] “A man barely alive. LG brand dunces almost killed him. Gentlemen, we can rebuild him. We have the technology. We have the capability to build the world’s first bionic external drive. Steve ASUS will be that external drive. Better than he was before. Better, stronger, faster.”


  9. pgl

    Alex Jones appeared before the 1/6 committee and took the 5th to hundreds of questions. One of the questions was “what did you have for breakfast”. He refused to even answer that!

    1. Moses Herzog

      My first guess was going to be immigrant dreamers’ organs. Then came small children leaving the Synagogue. Then came raw sausage dipped in colloidal silver. Then my last guess was going to be orphaned Austin children.

      I have to give myself credit, those really were all good guesses.

  10. ltr


    January 22, 2022

    China remains world’s leading shipbuilder in 2021

    BEIJING — China’s shipbuilding sector continued to take the lead globally last year, as busy maritime transport across the world pushed up ship demand.

    The country’s shipbuilding output, an indicator reflecting the vitality of the sector, amounted to 39.7 million deadweight tonnes (dwt) in 2021, rising 3 percent year on year, data from the Ministry of Industry and Information Technology showed.

    The 2021 output accounted for 47.2 percent of the world’s total, up 4.1 percentage points from that in 2020, the ministry said.

    New shipbuilding orders, another major indicator of the shipbuilding industry, surged 131.8 percent year on year to 67.07 million dwt in 2021, accounting for 53.8 percent of the global market share….

    1. ltr


      January 26, 2022

      China completes health check on BDS satellite constellation

      A health check on all 52 in-orbit satellites of China’s BeiDou Navigation Satellite System (BDS) has been completed, according to the Xi’an Satellite Control Center.

      The center said the satellites met all key indicators, meaning the constellation can provide services without issue.

      The evaluation was conducted without interrupting the satellites’ usual navigation services, and developers and users were invited to participate in the process.

      In addition to the assessment, a bespoke maintenance plan was drawn up for each satellite to ensure operational efficiency.

      China officially commissioned BDS on July 31, 2020, opening the new BDS-3 system to global users….

  11. Barkley Rosser

    Congratulations to Menzie and Jim for this blog again being among the top 100 economics blogs according to the 1/19/22 report by The Intelligent Economist.

    1. Moses Herzog

      First, I’d like to thank my high school wrestling coach and also all the inspiration I got in my teenage years from reading Nancy Drew stories. And who could forget my many appearances on DWTS with Bristol Palin. It’s not easy holding this operation up you know.

  12. Anonymous

    Oil price back up on Ukraine jitters.

    I think Biden should just stop talking about Ukraine (let it fall out of the media cycle). Let the Russians do what they are going to do, with less press attached to it. It’s not a vital interest. And we are not the world’s policeman to right every wrong.

    Yes, he will be criticized by Fox News and by the Democrat neocons. But it’s not like these hodads are going to go to war. Biden did the right thing pulling out of Afghanistan and it was always going to be a CF so spare me the “style points” on how we got out. What, should we have spent another 20 years of trying to square the circle? Sometimes, you just can’t have a nice pretty answer. We need to stop exaggerating our level of control of the world.

    1. Anonymous

      another biden clown show.

      send long range offensive weapons to which ever plutocrat is atop ukraine and…

      nato is making ukraine a trans-shipping point for stingers and javelins going to the isil, al qadea etc.

      thank God hw bush got the nukes out of there.

  13. Macroduck

    More appropriate to the prior post:

    U.S. corporate junk bond yields, adjusted for inflation, are now negative. Have been since May. Some of that is very low term premium on Treasures, but some of it is inflation expectations below current realized inflation.

    Appetite for yield is still quite high. Risk appetite is live and well. Stock market (and crypto-gambling) troubles may not be as simple as a mechanical response to the Fed.

    1. pgl

      Are you using nominal rates minus actual inflation? I just checked FRED which reports the nominal rate on BBB rated long-term corporate bonds (still investment grade) and the yield = 3.7%. That is a 1.5% credit spread over the nominal interest rate on long-term government bonds (2.2%). Now expected inflation is no where near 3.7%. Yes actual inflation over the past year is higher but let’s be clear what you are calculating here.

  14. ltr


    January 26, 2022

    Chinese mainland reports 44 new COVID-19 cases

    The Chinese mainland recorded 44 confirmed COVID-19 cases on Tuesday, with 24 linked to local transmissions and 20 from overseas, data from the National Health Commission showed on Wednesday.

    A total of 64 new asymptomatic cases were also recorded, and 778 asymptomatic patients remain under medical observation.

    Confirmed cases on the Chinese mainland now total 105,749, with the death toll remaining unchanged at 4,636 since January last year.

    Chinese mainland new locally transmitted cases


    Chinese mainland new imported cases


    Chinese mainland new asymptomatic cases


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