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Foreign direct investment, financial development and political risks

Author

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  • Nabamita Dutta*
  • Sanjukta Roy

    (University of Wisconsin - La Crosse, USA
    World Bank Institute, USA)

Abstract

Financial development is definitely a determinant of the extent of foreign direct investment (FDI) inflow into an economy. Yet, the contribution of financial development (FD) can be dependent on the political situation of the recipient nation. Higher political stability aids financial institutions to reap the benefits of FDI efficiently. Our paper empirically investigates the role of political risk in the association of FDI and FD. Using a panel of 97 countries, we show the relationship to be strictly non-linear. The impact of FD on FDI becomes negative beyond a threshold level of FD. However, we do find political risk factors to be affecting the relationship by altering the threshold level of financial development.

Suggested Citation

  • Nabamita Dutta* & Sanjukta Roy, 2011. "Foreign direct investment, financial development and political risks," Journal of Developing Areas, Tennessee State University, College of Business, vol. 44(2), pages 303-329, January-M.
    • Handle: RePEc:jda:journl:vol.44:year:2011:issue2:pp:303-329
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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