The effects of economic policy uncertainty on outward foreign direct investment

This research article aims to analyze the impact that economic policy uncertainty has on foreign direct investment (FDI), which has long remained elusive due to the challenge of thoroughly and accurately quantifying uncertainty. For this purpose, the recently developed Economic Policy Uncertainty Index (EPU Index) is used as a measure of economic policy uncertainty for both the U.S. and a panel of twenty U.S. Direct Investment Abroad (USDIA) host countries. The results demonstrate a strong causal link between the level of economy policy uncertainty and U.S. outward FDI flow. Outward FDI is found to peak three quarters after a shock in the domestic EPU Index, and to decrease two quarters after a shock in the host country's EPU Index. Our findings indicate the relevance of economic policy uncertainty for the investment decisions of multinational enterprises (MNEs) in the U.S., and show that it could represent a tool policy makers could use to forecast and monitor changes in foreign direct flow.