Does partisan conflict deter FDI inflows to the US?

Abstract

I analyze how partisan conflict about trade policy affects foreign direct investment flows to the US using a novel indicator, the Trade Partisan Conflict Index (TPCI). Partisan conflict is relevant for the evolution of cross-border capital flows because the expected returns on investment projects are less predictable when the timing, size, and composition of trade policy is uncertain. The trade partisan conflict index tracks the evolution of political disagreement among policymakers on topics such as tariffs, subsidies, and trade agreements as reported by the media. Using data from 1985 to 2016, I show that an innovation of the TPCI is associated with a significant decline in FDI flows to the US. The effect is also present when disaggregated (annual) data from a panel of parent countries is considered instead.