Impact of Economic Policy Uncertainty on the Outward Foreign Direct Investment of Chinese Firms

Impact of Economic Policy Uncertainty on the Outward Foreign Direct Investment of Chinese Firms

Purpose - This study empirically investigated the effect of Economic Policy Uncertainty (EPU) on the OFDI of Chinese firms. It also explores other factors influencing OFDI, such as market potential, economic openness, firm size, profitability, and the importance of control variables in the analysis. Design/Methodology/Approach - The panel data was established from 2004 to 2020, and a fixed-effects model was adopted for empirical analysis. EPU data was used as the main explanatory variable, and country-level variables such as overseas market potential, per capita GDP, and degree of economic openness, and firm-level variables such as firm size, capital structure, and return on total assets were applied as control variables. Findings - The results of regression using a fixed-effects model suggest that rising policy uncertainty in both Chinese and foreign economies reduces Chinese OFDI. OFDI’s decisions were also found to be influenced by a firm’s characteristics. This negative relationship is influenced by capital flow restrictions, financing constraints, and a focus on the home market. Additionally, foreign economic policy uncertainty (FEPU) in target countries also has a negative impact on Chinese firm OFDI, influenced by currency risk, policy restrictions, and risk assessment, making firms more cautious of cross-border investments. Research Implications - To promote Chinese firm Outward Foreign Direct Investment (OFDI), the Chinese government needs to provide a stable and predictable policy environment, as economic policy uncertainty negatively affects OFDI. Additionally, the analysis highlights the importance of understanding and mastering foreign market conditions, including financial policies, legal systems, infrastructure, and business environments, before making OFDI decisions.