variability is captured by the country fixed effects. Therefore, the regression analysis here focuses on periods in which there are large, statistically significant improvements (two standard deviations) in any two‐year period.<sup>22</sup> _Policy uncertainty._ When firms are uncertain about future demand and future policies, their expected risk‐ adjusted returns may not exceed the costs of capital or the returns on liquid financial assets. This may make firms unwilling to commit to irreversible physical investment, a result found in a number of firm‐ level studies on advanced economies. In macroeconomic studies, the uncertainty generated by political risk has been shown to weigh on investment (Appendix 2).<sup>23</sup> The regression includes, as proxy for political stability, the International Country Risk Guide (ICRG) political stability rating. A higher index indicates greater political stability. The ICRG political risk index is a weighted average of ratings of government stability, socioeconomic conditions, investment profile, corruption, the role of military in politics, law and order, external and internal conflict, religious and ethnic tensions, democratic accountability, and bureaucratic quality.

_Data._ Data sources are drawn from Haver Analytics, World Bank’s World Development Indicators, Oxford Economics, as well as the International Monetary Fund. Investment growth denotes the annual growth rate of real gross fixed capital formation. In instances where data on gross fixed capital formation are not available, gross capital formation is used as a proxy.

_Methodology._ A fixed effects panel regression is used to estimate the correlates of investment growth in 73 EMDEs with populations above 3 million for the period 1998‐2015. The econometric framework is similar to that of Nabar and Joyce (2009). However, the focus in this paper is on investment growth, as a critical component of overall output growth (ultimately, the source of rising living standards), rather than changes in the investment‐to‐GDP ratio that would only capture changes in investment growth relative to output growth. This is in line with recent studies on advanced economies (Banerjee, Kearns and Lombardi 2015; Bussiere, Ferrara, and Milovic 2016; Barkbu et al. 2015; Kothari, Lewellen, and Warner 2015) or for individual EMDEs (Anand and Tulin 2014). The results are shown in Annex Table 1.1. The regressions control for sudden stops in capital inflows and for country‐fixed effects. Since several sudden stops occurred during global recessions and slowdowns, they also capture the impact of these episodes.

_Robustness_ . The choice of these explanatory variables is confirmed by a Bayesian Model Averaging approach (Annex Table 1.2). The results are broadly robust across subsamples, to the inclusion of event dummies such as for periods of large political risk events, and to the inclusion of five‐year‐ahead growth forecasts as additional explanatory variables. An alternative estimation technique, generalized method of moments, yields similar estimates. The results are also robust to the use of private investment growth (for a subset of countries and years) as the dependent variable. The analysis here employs a parsimonious specification to reduce collinearity between explanatory variables. However, the results are broadly robust to controlling for lagged public debt, squared lagged public debt, subcomponents of the ICRG index, and terms of trade volatility.

> 22 A similar variable can be constructed for major reform setbacks. However, when a dummy variable for such setbacks is included in the regression the estimated coefficient is insignificant.

> 23 Alesina and Perotti (1996); Bloom, Bond, and Van Reenen (2007); Gilchrist, Sim, and Zakrajsek (2014); Julio and Yook (2012); IFC (2016b).

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