Abstract
This study is devoted to the evaluation and scrutiny of political stability as a determinant of foreign direct investment (FDI) inflows to different countries. The primary objective of the research is to estimate the impact and influence of various indicators of political stability on foreign direct investment inflows. The analysis is delivered based on a database on cross-country FDI inflows of 66 FDI-importer countries and 98 FDI-exporter countries, in the period between 2001-2018. This article uses the assumption that the impact of political stability might be different for both the groups of developed and developing countries. As the developed economies have higher political stability, they tend to attract larger amounts of foreign direct investment compared to developing economies, where the political situation can be less stable. Furthermore, the estimation applies the gravity approach, while the main method used for the econometric calculations is the Pseudo Poisson Maximum Likelihood (PPML) regression. The outcome revealed that in most cases the indicators of political stability had a positive impact on the foreign direct investment inflows. However, the results are not constant for all groups of countries. Therefore, if a developed country is an importer of investment, then most of the indicators of political stability become significant and have a positive influence on the foreign direct investment. At the same time, if the importer is a developing country, then for the investor-developed economy, political stability becomes a significant factor. Similarly, if the FDI-exporter is a developing economy, then determinants of political stability are insignificant. Based on these results, possible recommendations for refined government policies can be suggested.
Highlights
Nowadays, foreign direct investment has become one of the main factors stimulating economic development for different countries, by virtue of an increase in technological exchanges and in the efficiency of households
The approach considered distance between the investor-country and the importer-country for foreign direct investment along with the market size of the economies of the countries, so the basic equation for the gravity model can be represented as follows: FDIijt where FDIijt represents flow of foreign direct investment from country i to country j in the time t, GDPi and GDPj are gross domestic products of the investor-country and the FDI-recipient country, which indicate the size of the economies, and Distij refers to the distance between the countries
For each pair of countries five regressions were run with the indices: corruption, government management, inclusion, external policy and political risk, which covered all the aforesaid indicators and which were calculated by the PRS-Group
Summary
Foreign direct investment has become one of the main factors stimulating economic development for different countries, by virtue of an increase in technological exchanges and in the efficiency of households. Many determinants of foreign direct investment are currently being studied, in conformity to the article. Institutional environment is one of the key factors that influence volumes of foreign direct investment inflows, including political risks and political stability of a country in particular. This can further be demonstrated when political stability in a country is higher, this leads to a fall in the risks for investors. Political risks can cause a negative impact on the attraction of foreign direct investment, because they affect the business environment between the countries, make the investors vulnerable and increase the expenses of conducting business
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