How Do Economic Policy Uncertainty, Geopolitical Risk, and Environmental Performance Affect Capital Flows? Evidence from Emerging Markets

V., Veeravel; Balakrishnan, A.

doi:2025.40.1.91

The Journal of Economic Integration 2025 March;40(1) :91-118.
DOI: https://doi.org/10.11130/jei.2024045

How Do Economic Policy Uncertainty, Geopolitical Risk, and Environmental Performance Affect Capital Flows? Evidence from Emerging Markets

Veeravel V., ¹ A. Balakrishnan, ²

¹Department of Management, Paari School of Business, SRM University AP, Amaravati, Andhra Pradesh, India
²Department of Banking Technology, School of Management, Pondicherry University, Kalapet, Puducherry, India

Corresponding Author: Veeravel V. ,Email: veeravel91@gmail.com

ABSTRACT

The present study empirically verifies the potential determinants of capital flows into the emerging countries. The study mainly focuses on the role of recently proposed variables viz economic policy uncertainty, geopolitical risk, and environmental performance index. We use balanced panel data for 13 countries spanning from the year 2002 to 2021. The study employs recently developed Machado and Silva (2019) method of moments quantile regression analysis to examine the drivers of capital flows. The study also employs dynamic panel data estimators which contain fully modified ordinary least square (FMOLS), and dynamic ordinary least square (DOLS), models to check the robustness and consistency of the results. The overall results show that lagged FDI_t-1,market size (GDPG), trade openness, economic freedom index, GPRC, and EPI have positive and significant effects on FDI inflows in the sample countries. The findings of the study bear significant implications for government, policy makers, and investors in several ways. The market size plays an important role in determining FDI inflows. Policymakers need to mainly focus on economic conditions of the developing countries. The findings also help to formulate the economic and monetary policies that can boost the FDI inflows. Finally, foreign investors (home countries) carefully look at the state-of-affairs of the economic policy uncertainty, geopolitical risk, and environmental sustainability before they park their money in the host countries.

JEL Classification

F21: International Investment; Long Term Capital Movements
C33: Models with Panel Data; Longitudinal Data; Spatial Time Series
D81: Criteria for Decision Making under Risk and Uncertainty
Q56: Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

Keywords: Captial Flows | Economic Policy Uncertainty | Environmental Performance Index | Geopolitical Risk