Article Sidebar
Downloads
Main Article Content
Abstract
Purpose — This study examines the association between home countries’ economic policy uncertainty (EPU) and foreign direct investment (FDI) inflows into Vietnam. It also investigates how social connections between home countries and Vietnam, measured by the Social Connectedness Index, moderate the EPU—FDI relationship.
Method — Using data from 12 home countries from 2011 to 2022, this study analyzes the impact of EPU on FDI inflows through regression models, incorporating the social connectedness index to explore moderating effects.
Findings — The results show that higher EPU significantly leads to lower FDI inflows into Vietnam. Social connectedness mitigates the negative impact of EPU on FDI by reducing information friction and enhancing trust in uncertain policy environments. These results are robust for home countries that experience periods of high global uncertainty and geopolitical risk and are members of APEC.
Implications — The findings suggest that both the home and host countries should focus on stabilizing their policies and leveraging social connections to mitigate the negative impact of policy uncertainty, which could improve policymaking and investment strategies.
Originality — This research uniquely examines how EPU in home countries affects FDI in a specific emerging country, Vietnam. It introduces social connections as a moderating factor, offering new insights into the interplay between policy uncertainty and international investment behavior.
Keywords
Article Details
Copyright (c) 2025 Thu Ha Nguyen, Truong Giang Nguyen, Cao Chuong Nguyen
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-ShareAlike 4.0 International License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
Economic Journal of Emerging Markets by Center for Economic Studies, Universitas Islam Indonesia is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
References
- Ahir, H., Bloom, N., & Furceri, D. (2019). Caution: Trade uncertainty is rising and can harm the global economy. VoxEU.Org. https://cepr.org/voxeu/columns/caution-trade-uncertainty-rising-and-can-harm-global-economy
- Arslan Ü., S. Y., & Güzel, A. E. (2018). Causal relationship between foreign direct investment and export: The case of developing economies of Asia. Asian Economic and Financial Review, 8(4), 537–551. https://doi.org/10.18488/journal.aefr.2018.84.537.551
- Azzimonti, M. (2019). Does partisan conflict deter FDI inflows to the US? Journal of International Economics, 120, 162–178. https://doi.org/10.1016/j.jinteco.2019.06.001
- Bailey, M., Cao, R., Kuchler, T., & Stroebel, J. (2018). The economic effects of social networks: Evidence from the housing market. Journal of Political Economy, 126(6), 2224–2276. https://doi.org/10.2139/ssrn.2753881
- Bailey, M., Cao, R., Kuchler, T., Stroebel, J., & Wong, A. (2018). Social connectedness: Measurement, determinants, and effects. Journal of Economic Perspectives, 32(3), 259–280. https://doi.org/10.1257/jep.32.3.259
- Bailey, M., Gupta, A., Hillenbrand, S., Kuchler, T., Richmond, R., & Stroebel, J. (2021). International trade and social connectedness. Journal of International Economics, 129, 103418. https://doi.org/10.1016/j.jinteco.2020.103418
- Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
- Bernanke, B. S. (1983). Irreversibility, Uncertainty, and Cyclical Investment. Quarterly Journal of Economics.
- Blonigen, B. A., & Piger, J. (2014). Determinants of foreign direct investment. Canadian Journal of Economics/Revue Canadienne d’économique, 47(3), 775–812. https://doi.org/10.1111/caje.12091
- Brown Jeffrey R., I. Z. S. P. A., & Weisbenner, S. (2008). Neighbors matter: Causal community effects and stock market participation. The Journal of Finance, 63(3), 1509–1531. https://doi.org/10.1111/j.1540-6261.2008.01364.x
- Buchanan Bonnie G., C. C. X. L. E., & Weihrich, S. (2017). Uncertainty and firm dividend policy—A natural experiment. Journal of Corporate Finance, 42, 179–197. https://doi.org/10.1016/j.jcorpfin.2016.11.008
- Burchardi Konrad B., C. T., & Hassan, T. A. (2019). Migrants, ancestors, and foreign investments. The Review of Economic Studies, 86(4), 1448–1486. https://doi.org/10.1093/restud/rdy044
- Büthe, T., & Milner, H. V. (2008). The politics of foreign direct investment into developing countries: Increasing FDI through international trade agreements? American Journal of Political Science, 52(4), 741–762. https://doi.org/10.1111/j.1540-5907.2008.00340.x
- Caldara, D., & Iacoviello, M. (2022). Measuring geopolitical risk. American Economic Review, 112(4), 1194–1225. https://doi.org/10.1257/aer.20201131
- Campello, M., Kankanhalli, G., & Kim, H. (2024). Delayed creative destruction: How uncertainty shapes corporate assets. Journal of Financial Economics, 153(January), 103786. https://doi.org/10.1016/j.jfineco.2024.103786
- Cheng, L. K., & Kwan, Y. K. (2000). What are the determinants of the location of foreign direct investment? The Chinese experience. Journal of International Economics, 51(2), 379–400. https://doi.org/10.1016/S0022-1996(99)00032-X
- Davies, R. B., Desbordes, R., & Ray, A. (2018). Greenfield versus merger and acquisition FDI: Same wine, different bottles? Canadian Journal of Economics/Revue Canadienne d’économique, 51(4), 1151–1190. https://doi.org/10.1111/caje.12353
- Drobetz, W., El Ghoul, S., Guedhami, O., & Janzen, M. (2018). Policy uncertainty, investment, and the cost of capital. Journal of Financial Stability, 39, 28–45. https://doi.org/10.1016/j.jfs.2018.08.005
- Duong, D. K., Phan, T. T. P., Pho, K. H., & McAleer, M. (2020). Impact of board characteristics and state ownership on dividend policy in Vietnam. Advances in Decision Sciences, 24(4), 1–34. https://doi.org/10.47654/v24y2020i4p1-34
- Egger, P., & Pfaffermayr, M. (2004). Distance, trade and FDI: a Hausman–Taylor SUR approach. Journal of Applied Econometrics, 19(2), 227–246. https://doi.org/10.1002/jae.721
- Fania, N., Yan, C., Kuyon, J. B., & Djeri, S. (2020). Geopolitical risks (GPRs) and foreign direct investments: A business risk approach. Global Journal of Management and Business Research, 20(1), 1–9.
- Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523–564. https://doi.org/10.1093/rfs/hhv050
- Haufler, A., & Stähler, F. (2013). Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes. International Economic Review, 54(2), 665–692. https://doi.org/10.1111/iere.12010
- Hsieh, H. C., Boarelli, S., & Vu, T. H. C. (2019). The effects of economic policy uncertainty on outward foreign direct investment. International Review of Economics & Finance, 64, 377–392. https://doi.org/10.1016/j.iref.2019.08.004
- Ismail, I. I. (2017). An empirical study on country risk as a predictor of market entry decisions: Impact of political, economic and financial risks on FDI inflows of Horn of Africa and Middle East North Africa Region (MENA). Marketing, 2(5), 24–32. https://doi.org/10.18775/jibrm.1849-8558.2015.25.3004
- Julio, B., & Yook, Y. (2016). Policy uncertainty, irreversibility, and cross-border flows of capital. Journal of International Economics, 103, 13–26. https://doi.org/10.1016/j.jinteco.2016.08.004
- Khan, M. M., & Akbar, M. I. (2013). The impact of political risk on foreign direct investment. MPRA Paper 47283. https://mpra.ub.uni-muenchen.de/47283/
- Kim, H., & Kung, H. (2017a). The asset redeployability channel: How uncertainty affects corporate investment. Review of Financial Studies, 30(1), 245–280. https://doi.org/10.1093/rfs/hhv076
- Kim, H., & Kung, H. (2017b). The asset redeployability channel: How uncertainty affects corporate investment. The Review of Financial Studies, 30(1), 245–280. https://doi.org/10.2139/ssrn.2022669
- Lensink, R., Hermes, N., & Murinde, V. (2000). Capital flight and political risk. Journal of International Money and Finance, 19(1), 73–92. https://doi.org/10.1016/S0261-5606(99)00051-8
- Liu, J., & Wang, H. (2022). Economic policy uncertainty and the cost of capital. International Review of Financial Analysis, 81, 102070. https://doi.org/10.1016/j.irfa.2022.102070
- Ly, A., Esperança, J., & Davcik, N. S. (2018). What drives foreign direct investment: The role of language, geographical distance, information flows and technological similarity. Journal of Business Research, 88, 111–122. https://doi.org/10.1016/j.jbusres.2018.03.007
- Mishra, B. R., & Jena, P. K. (2019). Bilateral FDI flows in four major Asian economies: a gravity model analysis. Journal of Economic Studies, 46(1), 71–89. https://doi.org/10.1108/JES-07-2017-0169
- Nguyen, C. P., & Lee, G. S. (2021). Uncertainty, financial development, and FDI inflows: Global evidence. Economic Modelling, 99, 105473. https://doi.org/10.1016/j.econmod.2021.02.014
- Ouimet, P., & Tate, G. (2020). Learning from coworkers: Peer effects on individual investment decisions. The Journal of Finance, 75(1), 133–172. https://doi.org/10.1111/jofi.12830
- Paul, J., & Feliciano-Cestero, M. M. (2021). Five decades of research on foreign direct investment by MNEs: An overview and research agenda. Journal of Business Research, 124, 800–812. https://doi.org/10.1016/j.jbusres.2020.04.017
- Phan, H. V, Nguyen, N. H., Nguyen, H. T., & Hegde, S. (2019). Policy uncertainty and firm cash holdings. Journal of Business Research, 95, 71–82. https://doi.org/10.1016/j.jbusres.2018.10.001
- Rivoli, P., & Salorio, E. (1996). Foreign direct investment and investment under uncertainty. Journal of International Business Studies, 27(2), 335–357. https://doi.org/10.1057/palgrave.jibs.8490138
- Wagner, D., Head, K., & Ries, J. (2002). Immigration and the trade of provinces. Scottish Journal of Political Economy, 49(5), 507–525. https://doi.org/10.1111/1467-9485.00245
- Xu, Z. (2020). Economic policy uncertainty, cost of capital, and corporate innovation. Journal of Banking & Finance, 111, 105698. https://doi.org/10.1016/j.jbankfin.2019.105698
References
Ahir, H., Bloom, N., & Furceri, D. (2019). Caution: Trade uncertainty is rising and can harm the global economy. VoxEU.Org. https://cepr.org/voxeu/columns/caution-trade-uncertainty-rising-and-can-harm-global-economy
Arslan Ü., S. Y., & Güzel, A. E. (2018). Causal relationship between foreign direct investment and export: The case of developing economies of Asia. Asian Economic and Financial Review, 8(4), 537–551. https://doi.org/10.18488/journal.aefr.2018.84.537.551
Azzimonti, M. (2019). Does partisan conflict deter FDI inflows to the US? Journal of International Economics, 120, 162–178. https://doi.org/10.1016/j.jinteco.2019.06.001
Bailey, M., Cao, R., Kuchler, T., & Stroebel, J. (2018). The economic effects of social networks: Evidence from the housing market. Journal of Political Economy, 126(6), 2224–2276. https://doi.org/10.2139/ssrn.2753881
Bailey, M., Cao, R., Kuchler, T., Stroebel, J., & Wong, A. (2018). Social connectedness: Measurement, determinants, and effects. Journal of Economic Perspectives, 32(3), 259–280. https://doi.org/10.1257/jep.32.3.259
Bailey, M., Gupta, A., Hillenbrand, S., Kuchler, T., Richmond, R., & Stroebel, J. (2021). International trade and social connectedness. Journal of International Economics, 129, 103418. https://doi.org/10.1016/j.jinteco.2020.103418
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
Bernanke, B. S. (1983). Irreversibility, Uncertainty, and Cyclical Investment. Quarterly Journal of Economics.
Blonigen, B. A., & Piger, J. (2014). Determinants of foreign direct investment. Canadian Journal of Economics/Revue Canadienne d’économique, 47(3), 775–812. https://doi.org/10.1111/caje.12091
Brown Jeffrey R., I. Z. S. P. A., & Weisbenner, S. (2008). Neighbors matter: Causal community effects and stock market participation. The Journal of Finance, 63(3), 1509–1531. https://doi.org/10.1111/j.1540-6261.2008.01364.x
Buchanan Bonnie G., C. C. X. L. E., & Weihrich, S. (2017). Uncertainty and firm dividend policy—A natural experiment. Journal of Corporate Finance, 42, 179–197. https://doi.org/10.1016/j.jcorpfin.2016.11.008
Burchardi Konrad B., C. T., & Hassan, T. A. (2019). Migrants, ancestors, and foreign investments. The Review of Economic Studies, 86(4), 1448–1486. https://doi.org/10.1093/restud/rdy044
Büthe, T., & Milner, H. V. (2008). The politics of foreign direct investment into developing countries: Increasing FDI through international trade agreements? American Journal of Political Science, 52(4), 741–762. https://doi.org/10.1111/j.1540-5907.2008.00340.x
Caldara, D., & Iacoviello, M. (2022). Measuring geopolitical risk. American Economic Review, 112(4), 1194–1225. https://doi.org/10.1257/aer.20201131
Campello, M., Kankanhalli, G., & Kim, H. (2024). Delayed creative destruction: How uncertainty shapes corporate assets. Journal of Financial Economics, 153(January), 103786. https://doi.org/10.1016/j.jfineco.2024.103786
Cheng, L. K., & Kwan, Y. K. (2000). What are the determinants of the location of foreign direct investment? The Chinese experience. Journal of International Economics, 51(2), 379–400. https://doi.org/10.1016/S0022-1996(99)00032-X
Davies, R. B., Desbordes, R., & Ray, A. (2018). Greenfield versus merger and acquisition FDI: Same wine, different bottles? Canadian Journal of Economics/Revue Canadienne d’économique, 51(4), 1151–1190. https://doi.org/10.1111/caje.12353
Drobetz, W., El Ghoul, S., Guedhami, O., & Janzen, M. (2018). Policy uncertainty, investment, and the cost of capital. Journal of Financial Stability, 39, 28–45. https://doi.org/10.1016/j.jfs.2018.08.005
Duong, D. K., Phan, T. T. P., Pho, K. H., & McAleer, M. (2020). Impact of board characteristics and state ownership on dividend policy in Vietnam. Advances in Decision Sciences, 24(4), 1–34. https://doi.org/10.47654/v24y2020i4p1-34
Egger, P., & Pfaffermayr, M. (2004). Distance, trade and FDI: a Hausman–Taylor SUR approach. Journal of Applied Econometrics, 19(2), 227–246. https://doi.org/10.1002/jae.721
Fania, N., Yan, C., Kuyon, J. B., & Djeri, S. (2020). Geopolitical risks (GPRs) and foreign direct investments: A business risk approach. Global Journal of Management and Business Research, 20(1), 1–9.
Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523–564. https://doi.org/10.1093/rfs/hhv050
Haufler, A., & Stähler, F. (2013). Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes. International Economic Review, 54(2), 665–692. https://doi.org/10.1111/iere.12010
Hsieh, H. C., Boarelli, S., & Vu, T. H. C. (2019). The effects of economic policy uncertainty on outward foreign direct investment. International Review of Economics & Finance, 64, 377–392. https://doi.org/10.1016/j.iref.2019.08.004
Ismail, I. I. (2017). An empirical study on country risk as a predictor of market entry decisions: Impact of political, economic and financial risks on FDI inflows of Horn of Africa and Middle East North Africa Region (MENA). Marketing, 2(5), 24–32. https://doi.org/10.18775/jibrm.1849-8558.2015.25.3004
Julio, B., & Yook, Y. (2016). Policy uncertainty, irreversibility, and cross-border flows of capital. Journal of International Economics, 103, 13–26. https://doi.org/10.1016/j.jinteco.2016.08.004
Khan, M. M., & Akbar, M. I. (2013). The impact of political risk on foreign direct investment. MPRA Paper 47283. https://mpra.ub.uni-muenchen.de/47283/
Kim, H., & Kung, H. (2017a). The asset redeployability channel: How uncertainty affects corporate investment. Review of Financial Studies, 30(1), 245–280. https://doi.org/10.1093/rfs/hhv076
Kim, H., & Kung, H. (2017b). The asset redeployability channel: How uncertainty affects corporate investment. The Review of Financial Studies, 30(1), 245–280. https://doi.org/10.2139/ssrn.2022669
Lensink, R., Hermes, N., & Murinde, V. (2000). Capital flight and political risk. Journal of International Money and Finance, 19(1), 73–92. https://doi.org/10.1016/S0261-5606(99)00051-8
Liu, J., & Wang, H. (2022). Economic policy uncertainty and the cost of capital. International Review of Financial Analysis, 81, 102070. https://doi.org/10.1016/j.irfa.2022.102070
Ly, A., Esperança, J., & Davcik, N. S. (2018). What drives foreign direct investment: The role of language, geographical distance, information flows and technological similarity. Journal of Business Research, 88, 111–122. https://doi.org/10.1016/j.jbusres.2018.03.007
Mishra, B. R., & Jena, P. K. (2019). Bilateral FDI flows in four major Asian economies: a gravity model analysis. Journal of Economic Studies, 46(1), 71–89. https://doi.org/10.1108/JES-07-2017-0169
Nguyen, C. P., & Lee, G. S. (2021). Uncertainty, financial development, and FDI inflows: Global evidence. Economic Modelling, 99, 105473. https://doi.org/10.1016/j.econmod.2021.02.014
Ouimet, P., & Tate, G. (2020). Learning from coworkers: Peer effects on individual investment decisions. The Journal of Finance, 75(1), 133–172. https://doi.org/10.1111/jofi.12830
Paul, J., & Feliciano-Cestero, M. M. (2021). Five decades of research on foreign direct investment by MNEs: An overview and research agenda. Journal of Business Research, 124, 800–812. https://doi.org/10.1016/j.jbusres.2020.04.017
Phan, H. V, Nguyen, N. H., Nguyen, H. T., & Hegde, S. (2019). Policy uncertainty and firm cash holdings. Journal of Business Research, 95, 71–82. https://doi.org/10.1016/j.jbusres.2018.10.001
Rivoli, P., & Salorio, E. (1996). Foreign direct investment and investment under uncertainty. Journal of International Business Studies, 27(2), 335–357. https://doi.org/10.1057/palgrave.jibs.8490138
Wagner, D., Head, K., & Ries, J. (2002). Immigration and the trade of provinces. Scottish Journal of Political Economy, 49(5), 507–525. https://doi.org/10.1111/1467-9485.00245
Xu, Z. (2020). Economic policy uncertainty, cost of capital, and corporate innovation. Journal of Banking & Finance, 111, 105698. https://doi.org/10.1016/j.jbankfin.2019.105698