Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240703 
Year of Publication: 
2020
Series/Report no.: 
Working Papers No. 2020-14
Publisher: 
Banco de México, Ciudad de México
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.
Subjects: 
trade policy uncertainty
foreign direct investment
real options
JEL: 
F40
F62
F21
Document Type: 
Working Paper
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