The Influence of Political Risk on Foreign Direct Investment (FDI) in Developing Countries
Keywords:
Political risks, foreign direct investment (FDI), developing countries, decisions.Abstract
Aim: This study sought to provide a more nuanced understanding of the impact of political risk on FDI in developing countries.
Methods: This study employed a desktop literature review. This included academic articles, reports by international organizations such as the World Bank and the International Monetary Fund, as well as government publications.
Results: The study found a negative relationship between political risk and FDI inflows in emerging economies, indicating that investors are less likely to invest in countries with higher political risk. Furthermore, the study found that the negative impact of political risk on FDI inflows is more significant for countries with weaker institutions and lower levels of economic development. Additionally, the study found that the effect of political risk on FDI varies depending on the type of industry. The negative effect of political risk is found to be stronger in the service sector compared to the manufacturing sector.
Conclusion: Political instability, corruption, and weak governance can create an unpredictable and hostile investment climate, which can discourage foreign investors from investing in the country.
Recommendations: Developing countries should focus on building strong political institutions that provide stability, transparency, and predictability to investors. Developing countries should enhance trade agreements and harmonizing regulatory frameworks to attract more FDI to the region.
References
Baek, K., & Qian, X. (2011). An analysis on political risks and the flow of foreign direct investment in developing and industrialized economies. Economics, Management and Financial Markets, 6(4), 60.
Busse, M., & Hefeker, C. (2007). Political risk, institutions and foreign direct investment. European journal of political economy, 23(2), 397-415.
Duce, M., & España, B. D. (2003). Definitions of Foreign Direct Investment (FDI): a methodological note. Banco de Espana, 6(2), 43-49.
Gupta, A., & Misra, A. K. (2020). Political risk and foreign direct investment: Evidence from emerging economies. International Journal of Emerging Markets, 15(5), 920-937.
Hayakawa, K., Kimura, F., & Lee, H. H. (2013). How does country risk matter for foreign direct investment?. The Developing Economies, 51(1), 60-78.
Helleiner, G. K. (1973). Manufactured exports from less-developed countries and multinational firms. The Economic Journal, 83(329), 21-47.
Huang, Y., & Wei, S. J. (2014). Investment and asset allocation with political risk. Journal of International Economics, 92(1), 61-77.
Jensen, N. (2008). Political risk, democratic institutions, and foreign direct investment. The Journal of Politics, 70(4), 1040-1052.
Kim, Y., & Cho, Y. (2019). Political risk and foreign direct investment: Evidence from South Korea. Journal of International Trade & Commerce, 15(3), 259-278.
Kimenyi, M., Adibe, J., Djiré, M., & Jirgi, A. J. (2014). The impact of conflict and political instability on agricultural investments in Mali and Nigeria.
Kurtishi-Kastrati, S. (2013). The Effects of Foreign Direct Investments for Host Country's Economy. European journal of interdisciplinary studies, 5(1).
Li, Q. (2006). Political violence and foreign direct investment. In Regional economic integration (Vol. 12, pp. 225-249). Emerald Group Publishing Limited.
Ma, Q., & Shi, J. (2018). Political risk and foreign direct investment: Evidence from China. China Economic Review, 49, 271-290.
Niu, B., & Zhang, H. (2019). Political risk and foreign direct investment: Evidence from the Belt and Road Initiative. International Journal of Finance and Economics, 24(4), 1551-1567.
Ozturk, I., & Acaravci, S. K. (2018). The role of political risk on foreign direct investment and firm performance: Evidence from emerging market multinationals. International Journal of Finance and Economics, 23(3), 318-333.
Reddy, K. R., & Xiong, J. (2017). Political risk and foreign direct investment: Evidence from BRIC countries. Journal of International Trade and Economic Development, 26(8), 949-965.
Shahzad, A., & Qureshi, M. A. (2021). Institutional quality, political risk and foreign direct investment in South Asia. International Journal of Economics and Business Research, 21(1), 64-78.
Sun, Y., & Gao, W. (2017). Political risk and foreign direct investment: Evidence from China's One Belt One Road. Journal of Business Research, 81, 104-114.
Tian, Y., & Wang, X. (2017). Political risk, market uncertainty and foreign direct investment. China Economic Review, 44, 114-128.
Wang, S., & Chen, W. (2019). Political risk and foreign direct investment: Evidence from Chinese firms. Journal of World Business, 54(3), 234-246.
Downloads
Published
How to Cite
Issue
Section
License
The authors retain the copyright and grant this journal right of first publication. This license allows other people to freely share and adapt the work but must give appropriate credit, provide a link to the license, and indicate if changes were made. They may do so in any reasonable manner, but not in any way that suggests the licensor endorses them or their use.
