Abstract:
he importance of foreign direct investment (FDI) in developing countries has begun to spread very rapidly, especially after the transition of command economies countries into open markets. Many countries see attracting FDI as an important element in their strategy for economic growth because FDI is widely regarded as an amalgamation of capital, technology, marketing, and management. So, it is important to understand why in many countries FDI inflow is lower than the expected. This paper is to investigate the linkages between political risk and foreign direct investment inflows. International country risk guide (ICRG) has dispersed separate financial, economic, and political ratings, and has identified 12 different political risks indices. Theoretically, it seems that there is a relationship between FDI and political risks, which is precisely the analysis undertaken in the current study. This paper employs an instrumental variable approach to investigate Iran time series data from 1985 to 2016. Wu-Hausman test is used to test for the presence of endogeneity, and two-stage least square estimator (2SLS) is estimated to find out the relationship between political risks indices and FDI inflows in Iran. The results show that external conflict, ethnic tensions, socioeconomic condition, investment profile, military, and religious tensions are the highly significant determinants of foreign investment inflows in Iran
Machine summary:
Country risk can influence the foreign direct investments by means of the following levers: - limitation or restriction of the capital - political, economic or social events (strikes, military conflicts, elections) - loss of profit caused by economic crisis - corruption, legislative instability (Lapadusi and Ciurlau, 2016).
Busse and Hefeker (2007) explore the linkages between political risk, institutions and foreign direct investment inflows using data from 83 countries for the period 1984–2003 using different econometric techniques such as fixed effects and GMM estimator.
They found that among the political risk components, government stability, socioeconomic conditions, investment profile, internal and external conflict, corruption, democratic accountability, and religious and ethnic tensions had a direct positive relationship with FDI flows.
The study finds that the institutional quality variables of economic freedom, ease of doing business and international country risk (ICRG) have a positive and significant impact on FDI inflows in Arab economies.
The results of this study have several implications for policy makers Erkekoglu and Kilicarslan (2016), in the study that covers the years 2002-2012 and data from 91 countries, the impact of political risk on foreign direct investment has been demonstrated by conducting panel data analysis.
Kurul and Yalta (2017) revisit the relation between institutional factors and foreign direct investment (FDI) inflows in developing countries by employing a dynamic panel methodology, which enables us to deal with the persistency of FDI flows and endogeneity issues and also contribute to the literature by using various measures of institutions to identify which aspects of institutional quality affect FDI in the developing world.