Policy Uncertainty, Multinational Firms, and Reallocation

Sarkar, A (2019) Policy Uncertainty, Multinational Firms, and Reallocation. Working Paper. Job Market Paper. (Unpublished)

Abstract

Multinationals are often considered a tool through which economic shocks originating in a region get magnified. This paper, in contrast, shows that elevated economic policy uncertainty (EPU) in a country is associated with increase in investment by a firm in other regions. I find that (multinational) firms hold back investment in a country subjected to higher EPU, which they reallocate to projects in other countries. I find the impact to be higher for firms with tighter financial constraints. I also find that the reallocation is directed more towards countries that provide a better legal environment. The study uses establishment-level data of mining firms as a laboratory. Limited input–output linkage across mines allows me to study the impact caused particularly through the allocation decision of firms. The empirical strategy exploits variations in: i) parent country of mines operating in the same country; & ii) country of operation of mines owned by same firm. Overall, my findings highlight that multinationals could potentially stabilize the escalation of regional policy uncertainty shocks to global crisis.