Economic Policy Uncertainty and Investment: Cross-Country Evidence

Abstract

When investment is partially irreversible, uncertainty raises the option value of waiting and can delay investment. Yet evidence on the effects of economic policy uncertainty (EPU) remains predominantly US-based. This paper examines whether the negative EPU-investment relationship generalizes across countries. Using firm-level data for 25 countries from 1991 to 2024, the analysis estimates fixed-effects regressions of subsequent capital expenditures on the EPU index. A doubling in EPU is associated with a 10.8% decline in quarterly investment and a 14.9% decline in annual investment, on average. The negative association is widespread across countries and is particularly strong among firms with more irreversible investment, consistent with real options theory. However, the relationship varies substantially in magnitude across national settings with a minority of countries even exhibiting significant positive associations. These findings suggest that policy uncertainty is a broadly relevant determinant of corporate investment, while indicating that firms' responses depend on country-specific conditions.

Keywords: economic policy uncertainty; corporate investment; real options theory; cross-country evidence