Abstract
The fourth and final empirical study presented in this chapter that examines the relative importance of various political risks (e.g., expropriation risk, corruption, lack of democracy etc.) on different types of capital inflows (i.e., foreign direct investment (FDI), portfolio equity and private debt inflows). The focus of this chapter is on FDI inflows as FDI is the most prominent type of capital inflows and the influence of political risk is most prevalent on FDI inflows. A counterfactual simulation exercise is conducted to evaluate the percentage change in expected FDI inflows associated with improvements (e.g., one-standard-deviation and worst-to-best improvements) in various political risk measures. The results of this empirical analysis find that expropriation risk (i.e., the probability of losing 100% of invested capital) has among the largest effects on FDI, suggesting an intuitively appealing explanation for the lack of FDI flows to many capital-scarce developing countries.
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