Spillover Effects of Foreign Policy Uncertainty and their Impact on FDI Inflows in Asia–Pacific: A Panel Quantile Approach

Abstract This study investigates the nonlinear impact of foreign economic policy uncertainty (EPU) on foreign direct investment (FDI) inflows across 21 Asia-Pacific economies from 1993 to 2023. The research first employs the Diebold-Yilmaz spillover index to quantify the cross-border transmission of EPU, identifying Japan, Singapore, and Australia as the region’s primary uncertainty transmitters. Subsequently, a panel quantile regression model is applied to analyse how economies with varying levels of FDI integration respond to these external shocks. The findings reveal a significant nonlinear relationship: in economies with lower FDI inflows (0.1 quantile), an increase in foreign EPU is associated with a 0.505% decline in FDI, reflecting heightened risk aversion. Conversely, in economies with high FDI integration (0.9 quantile), the same shock corresponds to a 0.523% increase in inflows, indicating a “flight-to-safety” effect. These results suggest a one-size-fits-all policy approach is inadequate; low-FDI economies should prioritize institutional resilience to mitigate capital flight, while high-FDI economies must focus on financial stability to maintain their safe-haven status. Future research could build upon these findings by exploring sectoral-level impacts, a nuance not captured by this study’s aggregate data approach.