Does political risk deter FDI inflow? An analytical approach using panel data and factor analysis

Does political risk deter FDI inflow? An analytical approach using panel data and factor analysis Purpose – In today's increasingly globalized world, foreign direct investment (FDI) is a hotbed for discussion. Numerous studies have been undertaken regarding FDI, its determinants and benefits, but very few works provide importance to the effect of political risk on the inflow of FDI. Some papers introduce institutional or governance issues in determining FDI inflow, but a comprehensive framework in this respect is non‐existent. With this end in view, the authors take 146 countries worldwide over a period of 1984‐2009 and then classify countries as OECD or non‐OECD members to see whether there is any difference in the nature of the effect. The study keeps other possible determinants of FDI – market size, growth rate of real GDP, trade openness, infrastructural facilities as control variables while considering the effect of underlying political risk factors in deterring the FDI. Design/methodology/approach – This paper looks at the effect of political risk on FDI by using a systematic approach of factor analysis, in reducing the number of variables into their underlying factors and then generating factor scores. Then it uses a panel regression approach combined with factor analysis to examine which particular aspect of political risk contributes more towards deterring FDI inflow. Findings – The empirical results of this study refute the conventional notion that government failure is the primary contributing factor for poor FDI inflow. Rather, cultural conflict and the attitude of the partner country towards the host country are found to be mostly responsible for deterring FDI inflow. The result holds significantly even after controlling for traditional determinants regardless of whether it is an OECD member country or not. Practical implications – It is not just governance failure but the cultural factors and development partners' attitude about the country which mostly determines FDI inflow. Originality/value – This is the first paper which combines the factor analysis in a panel regression framework to examine the impact of political risk on FDI inflow. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Studies Emerald Publishing

Does political risk deter FDI inflow? An analytical approach using panel data and factor analysis

Journal of Economic Studies, Volume 41 (2): 20 – Mar 4, 2014

Loading next page...
 
/lp/emerald-publishing/does-political-risk-deter-fdi-inflow-an-analytical-approach-using-0d4s1ezCXr
Publisher
Emerald Publishing
Copyright
Copyright © 2014 Emerald Group Publishing Limited. All rights reserved.
ISSN
0144-3585
DOI
10.1108/JES-03-2012-0041
Publisher site
See Article on Publisher Site

Abstract

Purpose – In today's increasingly globalized world, foreign direct investment (FDI) is a hotbed for discussion. Numerous studies have been undertaken regarding FDI, its determinants and benefits, but very few works provide importance to the effect of political risk on the inflow of FDI. Some papers introduce institutional or governance issues in determining FDI inflow, but a comprehensive framework in this respect is non‐existent. With this end in view, the authors take 146 countries worldwide over a period of 1984‐2009 and then classify countries as OECD or non‐OECD members to see whether there is any difference in the nature of the effect. The study keeps other possible determinants of FDI – market size, growth rate of real GDP, trade openness, infrastructural facilities as control variables while considering the effect of underlying political risk factors in deterring the FDI. Design/methodology/approach – This paper looks at the effect of political risk on FDI by using a systematic approach of factor analysis, in reducing the number of variables into their underlying factors and then generating factor scores. Then it uses a panel regression approach combined with factor analysis to examine which particular aspect of political risk contributes more towards deterring FDI inflow. Findings – The empirical results of this study refute the conventional notion that government failure is the primary contributing factor for poor FDI inflow. Rather, cultural conflict and the attitude of the partner country towards the host country are found to be mostly responsible for deterring FDI inflow. The result holds significantly even after controlling for traditional determinants regardless of whether it is an OECD member country or not. Practical implications – It is not just governance failure but the cultural factors and development partners' attitude about the country which mostly determines FDI inflow. Originality/value – This is the first paper which combines the factor analysis in a panel regression framework to examine the impact of political risk on FDI inflow.

Journal

Journal of Economic StudiesEmerald Publishing

Published: Mar 4, 2014

Keywords: Foreign direct investment; Factor analysis; Panel data; Development partners' attitude; Political risk

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off