Does Partisan Conflict Deter FDI Inflows to the US?
I analyze the effects of political uncertainty on foreign direct investment flows to the US using a novel indicator, the partisan conflict index (PCI). Partisan conflict is relevant for the evolution of cross-border capital flows because the expected returns on investment projects are less predictable when the timing, size, and composition of fiscal policy is uncertain. The partisan conflict index tracks the evolution of political disagreement among policymakers as reported by the media. Using aggregate quarterly data from 1985 to 2015, I show that an innovation of the PCI is associated with a significant decline in FDI flows to the US. The magnitude of the effect is similar when disaggregated data from a panel of parent countries is considered instead.
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Document Object Identifier (DOI): 10.3386/w22336