International Journal of Academic Research in Business and Social Sciences

search-icon

The Effects of Political Risk, Macroeconomic and Country Specific Factors on FDI in Developing Countries

Open access
Background: Inadequate capital and poor governance are economic issues that concern developing countries which necessitates the need for capital such as Foreign Direct Investment (FDI) which is considered as the largest source of external funds to countries. In addition, fluctuations in the net FDI flow in developing countries has remained a major concern for policy makers. This vulnerable state of affairs warrants the motivation of this study. Objective: The objective is to determine the effects of political risk, macroeconomic and country specific factors on the net FDI flow per capita. Results: The panel regression analysis shows that political risk, GDP growth, exchange rate, gross fixed capital formation and natural resources rents have significant positive relationship with the net FDI flow per capita. In the short run error correction model, GDP growth, trade openness, exchange rate and natural resources rents are significant drivers of net FDI flow per capita. Conclusion: The ability of developing countries to attract FDI depends on political stability and positive sustainable economic development. In addition, the ability of developing countries to attract FDI depends on the ingenuity of policy makers to formulate policies in niche sectors to suit each country’s economic development goals.
Aleksynska, M., and Havrylchyk, O. (2013). FDI from the South: The Role of Institutional Distance and Natural Resources. European Journal of Political Economy, 29:38-53.
Ang, J. B., (2008). Determinants of Foreign Direct Investment in Malaysia. Journal of Policy Modeling, 30:185-189.
Bond, T. J. (1998). Capital Flows to Asia: The Role of Monetary Policy. Empirica, 25:165-182.
Engle, R. F. and Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica: Journal of the Econometric Society, 55:2
Ezeoha, A. E., and Cattaneo, N. (2012). FDI flows to sub-Saharan Africa: The impact of finance, institutions, and Natural resource endowment. Comparative Economic Studies, 54:597-632.
Hattari, R., and Rajan, R. S. (2009). Understanding bilateral FDI flows in developing Asia. Asian?Pacific Economic Literature, 23:73-93
Ho, C. S., and Rashid, H. A. (2011). Macroeconomic and country specific determinants of FDI. The Business Review, 18: 219-226.
Ibrahim, N. A. (2011). Causality between Exports and Productivity in the Malaysian Economy. The Singapore Economic Review, 56:377-395.
Jadhav, P. (2012). Determinants of Foreign Direct Investment in BRICS economies: Analysis of economic, institutional and political factor. Procedia-Social and Behavioural Sciences, 37:5-14.
Jiang, N., Liping, W., and Sharma, K. (2013). Trends, patters and determinants of Foreign Direct Investment in China. Global Business Review, 14: 201-210.
Jiménez, A. (2011). Political risk as a determinant of Southern European FDI in neighbouring developing countries. Emerging Markets Finance and Trade, 47:59-74.
Kok, R. and Ersoy, B. A. (2009). Analyses Of FDI Determinants In Developing Countries. International Journal of Social Economics, 36:105-123.
Liargovas, P. G. and Skandalis, K. S. (2011). Foreign Direct Investment and Trade openness: The Case of Developing Economies. Social Indicators Research, 106:323-331.
Mottaleb, K. A., and Kalirajan, K. (2010). Determinants of foreign direct investment in developing countries: A comparative analysis. Margin: The Journal of Applied Economic Research, 4: 369-404
Oladipo, S. O. (2013). Macroeconomic determinant of Foreign Direct Investment in Nigeria (1985-2010): A GMM approach. Journal of Emerging Issues in Economics, Finance and Banking, 2: 801-817.
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross?section dependence. Journal of Applied Econometrics, 22(2):265-312.
Quazi, R. (2007). Economic freedom and Foreign Direct Investment in East Asia. Journal of the Asia Pacific Economy, 12: 329-344.
Serin, V., and Çaliskan, A. (2010). Economic liberalization policies and Foreign Direct Investment in South-eastern Europe. Journal of Economic and Social Research, 12: 81-100
Shahrudin, N., Yusof, Z. and Satar, N. M. (2010). Determinants of Foreign Direct Investment in Malaysia: What matters most. International Review of Business Research Papers, 6: 235-245.
Sokchea, l., (2007). Bilateral Investment Treaties, Political Risk and Foreign Direct Investment, Asia Pacific Journal of Economics & Business, 11:6-24
Vijayakumar, N., Sridharan, K. S. P., and Rao, K. C. S. (2010). Determinants of FDI in BRICS Countries: A panel analysis. International Journal of Business Science & Applied Management, 5:1-13
Vita, G.D. and Kyaw, K. S. (2008). Determinants Of Capital Flows To Developing Countries: A Structural VAR Analysis. Journal of Economic Studies, 35:304-322.
Vogiatzoglou, K. (2007). Vertical specialization and new determinants of FDI: evidence from South and East Asia. Global Economic Review, 36:245-266.
Westerlund, J. (2008). Panel cointegration tests of the Fisher effect. Journal of Applied Econometrics, 23:193-233.
Wolff, G. B. (2007). Foreign direct investment in the enlarged EU: do taxes matter and to what extent? Open Economies Review, 18: 327-346.
World Investment Report, (2016). United Nations Conference on Trade and Developmen
In-Text Citation: (Hasli, Ibrahim, & Ho, 2019)
To Cite this Article: Hasli, A., Ibrahim, N. A., & Ho, C. S. F. (2019). The Effects of Political Risk, Macroeconomic and Country Specific Factors on FDI in Developing Countries. International Journal of Academic Research in Business and Social Sciences, 9(6), 369–382.