Political Risk and Foreign Direct Investment in Africa: The Case of the Nigerian Telecommunications Industry

Abstract

Foreign direct investment (FDI) flows are expected to be influenced by political risk factors. However, studies that evaluate the relationship between political risk and FDI flows in sub-Saharan Africa (SSA) are scarce. This study examines the impact of political risk on FDI flows in an SSA context using the 12 political risk components published as the International Country Risk Guide (ICRG) by the Political Risk Services (PRS) Group with the Nigerian telecommunications sector as a case study. The study finds that political risk has a significant influence on the inflow of FDI into developing economies in SSA such as Nigeria and that the 12 components affect FDI in different ways. Irrespective of the political risk rating, a consistent improvement in composite political risk enhances FDI inflow. Among the 12 components, corruption, law and order, democratic accountability, and investment profile were found to have significant influences on FDI inflow into the Nigerian telecommunications sector. Corruption, in particular, explains nearly two-thirds of the FDI inflow. © 2015 Wiley Periodicals, Inc.