This paper investigates the impact of global EPU and China’s EPU on China’s FDI inflows, examining whether financial development and political stability moderate these relationships. Using panel data from 212 countries spanning 2009 to 2022, we first establish causal direction through Granger causality tests, then employ instrumental variable estimation to address endogeneity concerns, while conducting heterogeneity analysis across development levels and Belt and Road Initiative participation. We find that both global and domestic EPU significantly reduce China’s FDI inflows, with a 1% increase in China’s EPU leading to a 0.083% decrease in FDI inflows. However, political stability and financial development serve as effective moderators, reducing EPU’s negative impact by up to 60% and 70%, respectively. The effects vary substantially across investor countries: non-developed countries show ten times stronger sensitivity to EPU than developed countries, while Belt and Road Initiative countries demonstrate 86% lower sensitivity than non-BRI countries. This research advances EPU–FDI theory by demonstrating how institutional quality creates “policy buffers” against uncertainty and provides policymakers with evidence that strengthening political stability and financial development can maintain investor confidence during uncertain periods, while strategic international partnerships can insulate investment flows from policy volatility.

Against the backdrop of unprecedented global FDI volatility—with flows declining 34.7% in 2020 and a further 12% in 2022—and China experiencing its first sustained capital outflow since reform, with foreign enterprises withdrawing over USD 160 billion in the first three quarters of 2023, understanding the complex mechanisms through which EPU affects international investment has become critically important. Existing research predominantly examines unilateral EPU effects while neglecting the bilateral dynamics that characterize modern interconnected economies, creating a significant gap in explaining recent FDI pattern shifts. This study systematically examines the differential impact mechanisms of EPU on China’s FDI inflows using panel data from 20 countries spanning 2005–2023, employing FE models and GMM methods. The research reveals that policy uncertainty affects international investment through two mechanisms: first, a “push effect” whereby relatively higher EPU in home countries drives FDI flows to China (β = 0.002, p < 0.001); second, a “consistency effect” where differences in policy environments between home countries and China impede FDI flows (β = −0.004, p < 0.001), with the latter effect being stronger. Moderating effects analysis demonstrates that institutional quality and bilateral political relations exert complex non-linear moderating effects on the EPU–FDI relationship. Heterogeneity tests reveal that when China’s EPU is relatively low, the negative impact of policy uncertainty is significantly weakened. This study extends real options theory and provides empirical evidence for the dual mechanisms of the EPU–FDI relationship, emphasizing that policy coordination is more important than relative policy advantages for international investment decisions. The findings provide theoretical foundations and practical guidance for policymakers to optimize international investment environments and strengthen policy coordination.