Political Uncertainty, FDI, and Trade in Intermediate Goods: Evidence From Ukrainian Firms
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We introduce a text-analysis-based method for measuring policy uncertainty and extend a heterogeneous-firms model with sunk investment costs to derive predictions about how trade policy uncertainty affects firm-specific investment and firms’ decisions to trade intermediate goods. Ukrainian firms faced a stark, mutually exclusive choice of trade regime — an EU free trade agreement or a Russia-led customs union — that we use to measure uncertainty directly. Using firm-product data for Ukrainian manufacturers from 2003 to 2013, we find that reduced uncertainty about the EU FTA sharply increased firm-level FDI inflows and imported intermediate goods from the EU while decreasing FDI from the customs union bloc, with more protected goods responding most strongly.
We introduce a text-analysis-based method for measuring policy uncertainty and extend a heterogeneous-firms model with sunk investment costs to derive predictions about how trade policy uncertainty affects firm-specific investment and firms’ decisions to trade intermediate goods. Ukrainian firms faced a stark, mutually exclusive choice of trade regime — an EU free trade agreement or a Russia-led customs union — that we use to measure uncertainty directly. Using firm-product data for Ukrainian manufacturers from 2003 to 2013, we find that reduced uncertainty about the EU FTA sharply increased firm-level FDI inflows and imported intermediate goods from the EU while decreasing FDI from the customs union bloc, with more protected goods responding most strongly.
Working paper: Working paper, 2018. With Jan Stuckatz.