CEPII, Recherche et Expertise sur l'economie mondiale
Cross-border Investments and Uncertainty Firm-level Evidence

Rafael Cezar
Timothée Gigout
Fabien Tripier

 Highlights :
  • We study the impact of uncertainty on cross-border investments.
  • We build a novel country and time-varying proxy for uncertainty based on FDI returns of French Multinational Firms.
  • A rise in uncertainty has a direct negative short-term impact on cross-border investment flows to the affected country.
  • Multinational firms with low ex-ante performance never recover while after a rise in uncertainty while higher performing multinational firms over compensate in the following periods.
  • A model based on financial frictions explain the effect of uncertainty shocks on foreign investments and the heterogeneous responses of multinational firms.

 Abstract :
This paper studies the impact of uncertainty on cross-border investments. We build a data-set of firm-level outward Foreign Direct Investments between 2000 and 2015. We create a time and country varying measure of uncertainty based on the dispersion of idiosyncratic investment returns. An increase in uncertainty delays cross-border flows to the affected country. Yet, this average effect hides strong heterogeneity. Firms with low ex-ante performance durably reduce their foreign investments. Meanwhile high-performing firms increase their investments after the initial shock. We interpret these results as the evidence of a cleansing effect of uncertainty shocks among multinational firms in the presence of financial frictions.

 Keywords : Uncertainty | Asymmetric Uncertainty | FDI flows | FDI Returns | Volatility | Multinational Firms

 JEL : D81, F23, G10, G15
CEPII Working Paper
N°2020-03, March 2020

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