Policy turmoil in China: a barrier for FDI flows?

Abstract

PurposeThis research examines the dynamic interrelationship between economic policy uncertainty (EPU) and the inflows of foreign direct investment (IFDI) in China.Design/methodology/approachThis research used the Granger causality and sub-sample time-varying rolling window causality method.FindingsThe empirical results reveal that EPU tends to have a negative impact on the IFDI in most periods that have been taken into consideration. However, there has been a positive relationship observed between the periods of the US subprime crisis. That is to say that the uncertainty of the Chinese economic policy does not always impede the IFDI. These results are supported by the general equilibrium model, which states that there are certain influences that come into play when moving from EPU to IFDI. On the other hand, the IFDI exert a positive influence on EPU during times of economic crisis and trade war, which indicates that the uncertainty in the economy may increase due to the sudden soar of foreign investment.Originality/valueDuring tense global trade situations and complicated economic scenarios, the results suggest the Chinese government should dedicate itself to expanding its initiatives to open up and improve the domestic business environment in order to increase the foreign investors' confidence and prevent the decline in the IFDI. In addition to this, it also suggests that multinational companies pay attention to the policy environment of the host country, especially when they decide to invest there.