Micro-economic Linkages Between Uncertainty and Investments

This content delves into the interlinkages between uncertainty and investments at a micro-economic level, focusing on the impact of global economic policy uncertainty on investment flows. It highlights the relationship between uncertainty and investments in both advanced and emerging economies, discussing how policy and regulatory uncertainty can influence organizational capacities and investment decisions.

• Uncertainty
• Investments
• Economic Policy
• Global Economy
• Emerging Economies

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1. Identifying micro-economic linkages between uncertainty and investments Plenary 4: Building Organisational capacities for tackling policy and regulatory uncertainty Parveer Singh Ghuman Sr. Research Associate, CUTS International

2. Overview Relationship between uncertainty and investment Increasing global economic policy uncertainty Declining global investment flows Interlinkages between uncertainty and investment Existing research primarily limited to advanced economies Way forward and Issues for deliberation

3. Global economic and policy uncertainty has increased over time Source: Baker Bloom and Davis Global Economic Policy Uncertainty Index (2016)

4. Global investment flows have failed to regain the levels witnessed before global financial crisis World FDI Inflows (USD mn) 2500000 2000000 1500000 1000000 500000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: UNCTAD World Investment Report (WIR) 2017

5. Interlinkages between uncertainty and investment Relationship between uncertainty and investment 250 250 200 200 150 150 100 100 50 50 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 WFDI('0000 mn) FDI-AE ('0000 mn) FDI-EE('0000 mn) AGEPU (WFDI) = global foreign direct investment inflows (FDI-AE) = foreign direct investment in in advance economies (FDI-EE) = foreign direct investment in in advance economies (AGEPU) = average global economic policy uncertainty

6. Existing research in emerging economies limited Several scholars have examined the relationship between uncertainty and investment in emerging economies; e.g. Bayraktar and Fofack (2007), Anand and Tulin (2014) Existing research in emerging economies appears to be macro-economic in nature Also, it does not venture into firm level or even sector specific data to understand relationship between investment and uncertainty in key sectors.

7. Way forward and Issues for deliberation The time is right to understand and analyse the relationship between uncertainty and investment in emerging economies Issues for further research and deliberation Considering lack of info and data in public domain, how can transparency and accountability be inculcated within the policymaking process? (Related issue: Is rising protectionism making the process less transparent and how will this impact investment patterns in the long- run?) With technological disruption becoming the norm, how can transition from traditional industries to new ones be facilitated (transition can be financially and psychologically tasking for industry players)? What are the sector specific issues vis-a-vis uncertainty and investment? What is the policy architecture of these sectors? What specific measures could be designed to reduce uncertainty and improve investments in specific sectors? For questions and comments, reach out to me at psg@cuts.org