The Effects of Policy Uncertainty on Different Types of FDI - a Global Analysis

Uncertainty incentivizes investors to wait-and-see and to hold back their investments. This paper investigates whether more liquid types of foreign direct investment are more affected by policy uncertainty than less liquid ones. Utilizing election data and the newly developed World Uncertainty Index, we examine how quarterly equity flows, reinvested earnings, and intra-company debt flows develop in times of high political uncertainty. In line with the real options theory, we find that reinvested earnings significantly drop in an election quarter. However, this only holds for high-income countries. In lower-middle- and low-income countries, electoral uncertainty negatively affects equity investments