Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/307918 
Year of Publication: 
2022
Citation: 
[Journal:] International Economics and Economic Policy [ISSN:] 1612-4812 [Volume:] 19 [Issue:] 4 [Publisher:] Springer [Place:] Berlin, Heidelberg [Year:] 2022 [Pages:] 783-823
Publisher: 
Springer, Berlin, Heidelberg
Abstract: 
Uncertainty incentivizes investors to wait-and-see and to hold back their investments. This paper investigates whether more liquid types of foreign direct investment (FDI) are affected more by political uncertainty than less liquid ones. Drawing from the real options theory, we develop hypotheses on the sensitivity of different types of FDI. We utilize descriptive statistics and a simple estimation approach to gauge the liquidity of quarterly equity investments, reinvested earnings, and intra-company debt. Then, we deploy election data and the World Uncertainty Index to examine how the three FDI subtypes respond to high political uncertainty. In line with the real options theory, 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, with higher institutional quality moderating the effect. In particular, the number of veto players and the government's credibility decrease the effect of uncertainty on FDI.
Subjects: 
Foreign direct investment
Political uncertainty
Reinvested earnings
Equity
Multinational enterprises
JEL: 
F21
F23
G18
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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