The Impact of Relative Economic Policy Uncertainty on China's FDI Inflows

Abstract

This paper examines the influence of relative economic policy uncertainty (EPU) on China's foreign direct investment (FDI) inflows. By analyzing the EPU levels in China, home country, and the global context, the study employs a panel fixed-effect model using monthly panel data collected from seven countries spanning from January 2007 to October 2019. The findings are as follows: Firstly, economic policy uncertainty in home country promotes China's FDI inflows. The EPU in these countries increases political risks and negatively affects market expectations, causing domestic capital to seek opportunities in the global market and flow to other nations. Secondly, China's own economic policy uncertainty (CNEPU) has both positive and negative effects on FDI within the mainland. To investigate this, the study calculates the volatility of CNEPU relative to global economic policy uncertainty (GEPU) using the semi-variance method and examines its impact on FDI. When fluctuations in China's economic policy uncertainty are driven by policy changes beneficial to foreign investors, higher CNEPU volatility compared to GEPU stimulates China's FDI inflows. Conversely, when fluctuations arise from policy changes detrimental to foreign investors, lower CNEPU volatility relative to GEPU still encourages China's FDI inflows. Lastly, global economic policy uncertainty (GEPU) positively influences China's foreign direct investment. During times of global economic ambiguity, China becomes a safe haven for international capital, positioning itself as a relatively attractive investment choice for foreign investors.