FDI and Political Risk: What’s the Empirical Relationship?

What’s the impact of political risk on FDI and vice versa?  Given some client questions to this end we had our researchers look into some of the literature on the topic that used our ICRG data.

First, an IMF Working Paper found that the presence of domestic conflict or major political instability has a large and negative effect on FDI inflows to emerging market economies, which highlights the role of inclusive policies to promote growth and avoid sudden stops of FDI inflows. (https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Economic-Policies-and-FDI-Inflows-to-Emerging-Market-Economies-25160)

Second, a recent edition of the World Bank’s Global Investment Competitiveness Report considered the effect of government regulations on inflows of FDI.  Using our Investment Profile risk metrics for 140 countries, there was a correlation between higher regulatory risk and expropriation risk insurance premiums and our ICRG metrics affecting Investment Profile. (https://pubdocs.worldbank.org/en/433411591134538669/211536-Chapter-4.pdf)

Finally, the effect of FDI on political risk found that inflows lead to a reduction in political risk; that it was more stabilizing in developed countries versus developing countries; and that full democracies tend to experience a more stabilizing effect from FDI that other types of regimes. https://scholar.dominican.edu/cgi/viewcontent.cgi?article=1005&context=barowsky-school-of-business-faculty-scholarship

Have a look when time permits.

The PRS Group: Challenging Borders, Challenging Risk

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