Trade policy uncertainty and foreign direct investment: Evidence from China’s WTO accession

Abstract

This paper investigates whether and how trade policy uncertainty (TPU) in major economies affects global foreign direct investment (FDI) flows. Using China’s World Trade Organization accession as a quasi-natural experiment, we find that China’s FDI inflows increased more in industries experiencing greater TPU reduction in the US market (China’s largest export destination market) than those in industries experiencing less reduction in TPU. We also find that TPU reduction is associated with larger increases in FDI inflows in industries with higher export intensities, suggesting that TPU reduction induces multinational firms to serve the US market through building and expanding affiliates in China. The findings suggest that TPU reduction in major economies would help global FDI flows to recover from the current pandemic.