The Effect of Country Risk on Foreign Direct Investment: A Dynamic Panel Data Analysis for Developing Countries

Abstract

Abstract. Issues created by inconsistency make difficult for investors to make healthy decisions. Risks and uncertainty may lead investors to have bad decisions which result in low level of profit from investments. The purpose of this study is to analyze the effect of country risk on the direct foreign investments (FDI). In the study in which annual data between the years of 2002 and 2014 belong to 49 countries are utilized, the relationships between the variables are analyzed through two phase system-GMM dynamic panel method. Three model assumptions are made for the study. According to the assumption results of the first model which focus on the country risk’s effect on the FDI inflows; the decrease in the country risk increases the FDI inflows. The results of second model through which the effects of sub elements of country risk (financial, economic and political risk) on the FDI are analyzed separately show that financial risk does not create statistically meaningful effect while the decrease in economic and political risk affects the FDI inflows in positive means. Finally, according to the results of the third model which focus on the effect of FDI inflows on the country risks; FDI creates a decreasing effect for country risk and indirectly inconsistencies.. Keywords. FDI, Developing countries, Country risk, Twostep system-GMM. JEL. C33, C36, E22, F22.