Understanding determinants of outward foreign direct investment: the role of economic policy uncertainty, institutional quality, and globalization
Keywords:
Outward FDI, EPU, Institutional quality, Globalization, Factor augmented modelAbstract
PurposeThis research aims to investigate the role of the economic policy uncertainty (EPU) in the outward FDI (OFDI) of the United Kingdom (UK) by considering the institutional quality (IQ) and globalization level of the host country as contextual factors.
Design/methodology/approachThe UK’s OFDI to its twenty partners is analyzed by using the factor augmented model for the 2005–2019 period.
FindingsThe results show that the EPU of the host country has a negative and significant effect on the UK's OFDI. Furthermore, the findings surprisingly illustrate that the globalization level of the host country has a negative and significant impact on the UK's OFDI. In terms of IQ, this study indicates that, while government effectiveness and regulatory quality have a negative and significant influence on the UK's OFDI, the rule of law has a positive and significant effect on the UK's OFDI.
Originality/valueThis will be one of a few studies considering OFDI in the scope of EPU. Also, the contradicting results of the study add unique perspectives to the literature about the relationship between OFDI, globalization, and IQ.
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Further reading
Armelius, H., Hull, I. and Köhler, H.S. (2017), “The timing of uncertainty shocks in a small open economy”, Economics Letters, Vol. 155 No. 2017, pp. 31-34, doi: 10.1016/j.econlet.2017.03.016.
Avom, D., Njangang, H. and Nawo, L. (2020), “World economic policy uncertainty and foreign direct investment”, Economics Bulletin, Vol. 40 No. 2, pp. 1457-1464.
Dreher, A. (2006), “Does globalization affect growth? Evidence from a new index of globalization”, Applied Economics, Vol. 38 No. 10, pp. 1091-1110, doi: 10.1080/00036840500392078.
Dunning, J.H. (1998), “Globalization and the new geography of foreign direct investment”, Oxford Development Studies, Vol. 26 No. 1, pp. 47-69, doi: 10.1080/13600819808424145.
Hayat, A. (2019), “Foreign direct investments, institutional quality, and economic growth”, The Journal of International Trade and Economic Development, Vol. 28 No. 5, pp. 561-579, doi: 10.1080/09638199.2018.1564064.
Helmy, H.E. (2013), “The impact of corruption on FDI: is MENA an exception?”, International Review of Applied Economics, Vol. 27 No. 4, pp. 491-514, doi: 10.1080/02692171.2012.752445.
İncekara, A. and Savrul, M. (2012), “The effect of globalization on foreign trade and investment in Eurasian Countries”, International Conference on Eurasian Economies, pp. 23-30, doi: 10.36880/C03.00485.
Kapetanios, G., Pesaran, M.H. and Yamagata, T. (2011), “Panels with non-stationary multifactor error structures”, Journal of Econometrics, Vol. 160 No. 2, pp. 326-348, doi: 10.1016/j.jeconom.2010.10.001.
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Marginean, S. (2015), “Economic globalization: from microeconomic foundation to national determinants”, Procedia Economics and Finance, Vol. 27 No. 2015, pp. 731-735, doi: 10.1016/S2212-5671(15)01055-2.
Masron, T.A. and Naseem, N.A. (2017), “Institutional quality and foreign direct investment in ASEAN”, Institutions and Economies, Vol. 9 No. 4, pp. 5-30.
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