Highlights :

• We study the impact of uncertainty on cross-border investments.
• We build a novel country and time-varying proxy for uncertainty based on FDI returns of French Multinational Firms.
• A rise in uncertainty has a direct negative short-term impact on cross-border investment flows to the affected country.
• Multinational firms with low ex-ante performance never recover while after a rise in uncertainty while higher performing multinational firms over compensate in the following periods.
• A model based on financial frictions explain the effect of uncertainty shocks on foreign investments and the heterogeneous responses of multinational firms.

 Abstract :
This paper studies the impact of uncertainty on cross-border investments. We build a data-set of firm-level outward Foreign Direct Investments between 2000 and 2015. We create a time and country varying measure of uncertainty based on the dispersion of idiosyncratic investment returns. An increase in uncertainty delays cross-border flows to the affected country. Yet, this average effect hides strong heterogeneity. Firms with low ex-ante performance durably reduce their foreign investments. Meanwhile high-performing firms increase their investments after the initial shock. We interpret these results as the evidence of a cleansing effect of uncertainty shocks among multinational firms in the presence of financial frictions.

 Keywords : Uncertainty | Asymmetric Uncertainty | FDI flows | FDI Returns | Volatility | Multinational Firms

 JEL : D81, F23, G10, G15