Geopolitical Risk and Cross-Border Investment: The Influence of Financial Sector Development

[Objective] This study is motivated by the limited empirical evidence on how financial sector development conditions the impact of geopolitical risk on cross-border investment. This study investigates the multifaceted relationship between geopolitical risk (GPR), foreign direct investment (FDI), and financial development. [Data/methods/approach] For empirical analysis, we employ the data of BRICS countries over the period from 1985 to 2022. The regression among variables was established by employing an Autoregressive Distributed Lag (ARDL) approach. [Findings] The findings reveal that GPR exerts a significant negative influence on FDI inflows. This negative effect can be explained as higher GPR levels diminishing the confidence of foreign investors, creating high market uncertainty, and enhancing the default risk of investment. In contrast, we observe the significant positive effect of financial development on FDI inflow. In line with expectations, a developed financial sector stabilizes the GPR-FDI relationship, underlining its importance in mitigating investment risk. [Policy implications] The policy implications are substantial, suggesting the need for measures to enhance political stability, bolster financial development, foster economic growth, invest in human capital, and carefully manage exchange rates to attract foreign investments. [Novelty] This study contributes to the literature by providing insights into the nuanced dynamics of FDI inflow in the BRICS nations, serving as a foundation for future research and informing policy decisions in these emerging economies.