The Nexus between Political Risks and Foreign Direct Investment: An Empirical Analysis for North African Countries

Abstract

Drawing from the ICRG data set, this study aims to analyze the intricate linkage between political risks and foreign direct investment via a number of control variables including trade openness, the consumer price index and per capita GDP. Since there has been a paucity of research on certain determinants of FDI in the North African context, we examine the impact of political risks on foreign direct investment inflows in six North African countries covering the period 1996-2014 accounting for the presence of possible cross- sectional dependence in the heterogeneous panel data. Whereas the results obtained from Pedroni (1999) and Johansen-Fisher co-integration tests show that there is a long-run co- integration relationship, coefficients obtained from the FM-OLS estimator indicate that a low level of political risks has a positive impact on the foreign direct investment inflows, albeit with some variation within select countries. The Canning and Pedroni (2008) causality test, on the other hand, finds evidence that there is a causal relationship between political risks and foreign direct investment for four countries (Algeria, Libya, Tunisia, and Egypt) in the sample. Hence, the results suggest that political risks are significant determinants of foreign direct investment for an array of countries in North Africa.