Foreign Direct Investment, Political Risk, Economic Development, Regime Types


Most of the existing literature in the FDI-political risk nexus has focused on the creation of economic models to assess foreign investment decisions in the presence of political risk. This is entirely legitimate and valuable as foreign investors are interested in assessing the political risk climate of their investment location. However, not much research has been done to assess how FDI could affect political risk. Globalization implies an increasing amount of cross-border investment and trade flows. For some countries, FDI is a huge component of their GDP. Since FDI is a composite bundle of capital stock, knowledge and technology (Balasubramanyam et al, 1996) and represents “International investment made with the objective of obtaining a lasting interest, by a resident entity in one economy in an enterprise resident in another economy” (OECD, 2000), we postulate that because of this stakeholder commitment, FDI could affect a country’s political risk level. The management literature has it that political risk measures the stability of individual countries based on factors grounded in government, society, security, and the economy (Bremmer, 2005). We expand on this notion to investigate whether, and if so, how FDI affects political risk? We believe that the contribution of our study is specifically in examining this reverse relationship running from FDI to political risk. In this preliminary paper we test this hypothesis for a sample of thirty countries in various stages of economic development and regime types over the 1984-2012 period. Preliminary results indicate that countries with increased FDI inflows demonstrate decreased levels of political risk. Although there are variations across countries, country groups that are considered developed and full democracies tend to exhibit the lowest levels of political risk. Our ongoing research is examining a sample of 140 countries using both time series and panel data techniques.

Full Text : PDF

  1. Addison, Tony, and S. Mansoob Murshed. 2003. "UNU/WIDER Special Issue on Conflict. Explaining Violent Conflict: Going Beyond Greed Versus Grievance." Journal of International Development 15, no. 4: 391-396.
  2. AlAzzawi, Shireen. 2012. "Innovation, Productivity and Foreign Direct Investment-Induced R&D Spillovers." Journal Of International Trade & Economic Development 21, no. 5: 615-653.
  3. Asiri, Batool K., and Rehab A. Hubail. 2014. "An Empirical Analysis of Country Risk Ratings." Journal Of Business Studies Quarterly 5, no. 4: 52-67.
  4. Baek, Kyeonghi, and Xingwan Qian. 2011. "An Analysis on Political Risks and the Flow of Foreign Direct Investment in Developing and Industrializaed Economies.” Economics, Management & Financial Markets 6, no. 4: 60-91. 
  5. Balasubramanyam, V. N., Salisu, M. A. and Sapsford, D. (1996), ‘Foreign Direct Investment and Growth in EP and IS Countries’, Economic Journal 106, no. 434: 92-105.
  6. Bremmer, Ian. 2005 “Managing Risk in an Unstable World.” Harvard Business Review, June 2005.
  7. Claude B. Erb, Campbell R. Harvey, and Tadas E. Viskanta. 1996. Political Risk, Economic Risk, and Financial Risk. Financial Analysts Journal, Vol. 52, No. 6:29-46.
  8. Development Policy and Analysis Division. 2014. “The Criteria for Identifying Least Developed Countries.” United Nations.
  9. Development Policy and Analysis Division. 2012. “LDC Data Retrieval.” United Nations. Retrieved from Excel for 2012. 
  10. Dunning, John H. 1979. "Explaining Changing Patterns of International Production: In Defense of the Eclectic Theory.” Oxford Bulletin Of Economics & Statistics 41, no. 4: 269-295.
  11. Dutta, Nabamita, and Sanjukta Roy. 2009. “The Impact of Foreign Direct Investment on Press Freedom.” Kylos 63(1).
  12. Ernst, B., Sooreea, R., Gokcek, G. and Spain, D. “The Economic Impacts of United Nations Peacekeeping Operations: Growth versus Level Effects,” International Journal of Public Policy 10, no. 1/2/3, 2014: 100-117.
  13. Ekpenyong, David B., and Ntiedo J. Umoren. 2010. "Political Risk and the Business Environment: An Examination of Core Challenges.” Journal Of Financial Management & Analysis 23, no. 1: 27-32.
  14. Feng, Sun. 2014. "The Dual Political Effects of Foreign Direct Investment in Developing Countries.” Journal Of Developing Areas 48, no. 1: 107-125. 
  15. Fitzpatrick, Mark. 1983. "The Definition and Assessment of Political Risk in International Business: A Review of the Literature." Academy Of Management Review 8, no. 2: 249-254.
  16. Frynas, Jerdrzej George, and Kamel Mellahi. 2003. "Political Risks as Firm-Specific (Dis)Advantages: Evidence on Transnational Oil Firms in Nigeria." Thunderbird International Business Review 45, no. 5: 541-565.
  17. Howell, Llewellyn D. 2014. "Evaluating Political Risk Forecasting Models: What Works?" Thunderbird International Business Review 56, no. 4: 305-316.
  18. Intelligence Unit. 2013. “Democracy Index 2012: Democracy at a Standstill.” The Economist Intelligence Unit Limited. 
  19. Iris, Kesternich, and Monika Schnitzer. 2007. "Who Is Afraid of Political Risk? Multinational Firms and Their Choice of Capital Structure." Journal of International Economics 82, 208-218.
  20. Kobrin, Stephen J. 1979. "Political Risk: A Review and Reconsideration.” Journal of International Business Studies 10, no. 1: 67-80.
  21. Lautier, Marc, and Francois Moreaub. 2012. "Domestic Investment and FDI in Developing Countries: The Missing Link.” Journal of Economic Development 37, no. 3: 1-23.
  22. Lewandowski, James P. 1997. “Political Risk and Foreign Direct Investment in Emerging Economies: Lessons from the Former Soviet Union.” Middle States Geographer, 30:97-104.
  23. The Multilateral Investment Guarantee Agency. 2011. “World Investment and Political Risk.” The International Bank for Reconstruction and Development/ The  World Bank.
  24. Political Risk Services Group. 2014. “International Country Risk Guide Methodology.” Last revised in 2001 and retrieved online on October 18, 2013. <>.
  25. Ritab, Al-Khouri, and Khalik M. Umaima Abdul. 2013. "Does Political Risk Affect the Flow of Foreign Direct Investment into the Middle East North African Region?” Journal of Global Business & Technology 9, no. 2: 47-59.
  26. Schroeder, Susan K. 2008. "The Underpinnings of Country Risk Assessment.” Journal of Economic Surveys 22, no. 3: 498-535.
  27. Sethi, S. Prakash, and K. A. N. Luther. 1986. "Political Risk Analysis and Direct Foreign Investment: Some Problems of Definition and Measurement.” International Executive 28, no. 2: 15-16.
  28. Sethi, S. Prakash, and K.A.N. Luther. 1986. "Political Risk Analysis and Direct Foreign Investment: Some Problems of Definition and Measurement." California Management Rev. 28, no. 2: 57-68. 
  29. Solomon, Blen, and Isabel Ruiz. 2012. "Political Risk, Macroeconomic Uncertainty, and the Patterns of Foreign Direct Investment." International Trade Journal 26, no. 2: 181-198.
  30. UNCTAD. 1997. World Investment Report 199.
  31. UNCTAD. 2014. “Annex Table 03 - FDI inward stock, by region and economy, 1990-2013.” UNCTAD World Investment Report 2014: Annex Tables.
  33. UNCTAD. 2014. Global Investment Trends Monitor, no. 15.
  34. UN Statistics Division. 2014. “Foreign direct investment, net inflows (BoP, current US$).” UNCTAD / UNdata.
  36. World Bank. 2014. “Country Analytical History.” Retrieved from Excel file: 
  38. World Bank. 2014. “Foreign Direct Investment, net flows (BoP, current US$).” Retrieved online on August 27, 2014. 
  39.        <>.
  40. Zhan, James. 2013. Latest Developments in FDI Trends and Policies. Investment, Enterprise and Development Commission (5th session) UNCTAD Conference.