The nexus between uncertainty and foreign direct investment flows to G20 member countries

Abstract

The main objective of this study is to examine the link between global economic, political, and geopolitical uncertainties and FDI flows to G20 member countries over the 1996-2018 period. Unlike most of the previous studies, this study employs reasonable uncertainty indexes, namely, the Economic Policy Uncertainty (EPU) index, the World Uncertainty Index (WUI) for economic/political uncertainty rather than the volatility or election indicators. The study also uses the Geopolitical Risk index as a proxy for geopolitical uncertainty, and thereby it not only focuses on economic/political uncertainty but also considers the geopolitical uncertainty to provide a more comprehensive picture of uncertainty. Findings obtained from the panel data analysis indicate that heightened uncertainty in the global economic/political and geopolitical environment deters FDI flows to G20 member countries. It is also found that there is a unilateral causality running from uncertainty to FDI inflows. Considering these empirical findings, policymakers in G20 economies should provide a stable economic/political and geopolitical environment to attach FDI inflows, which have a key role in stimulating economic growth and development.