AN ANALYSIS ON POLITICAL RISKS AND THE FLOW OF FOREIGN DIRECT INVESTMENT IN DEVELOPING AND INDUSTRIALIZED ECONOMIES
AN ANALYSIS ON POLITICAL RISKS AND THE FLOW OF FOREIGN DIRECT INVESTMENT IN DEVELOPING AND INDUSTRIALIZED ECONOMIES

Summary/Abstract: Do political risks discourage Foreign Direct Investment (FDI) in both developing and developed economies in a similar manner? In this paper, we examine whether and in what manner political risk affects FDI and compare its different effects in developing and developed economies. Using the 12 category Political Risk Index compiled by the International Country Risk Guide (ICRG), we find the following: First, political risk is a significant determinant of FDI in both industrialized and developing nations. Second, not all aspects of political risk affect FDI stocks in industrialized and developing countries in the same way. When we compare the effects of different political risk component, we find that since the 9/11 attacks, political risks have become more important and significant determinants of FDI flows, especially in industrialized nations.

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