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How Does Country Risk Matter for Foreign Direct Investment?

  • Kazunobu HAYAKAWA

    (Kazunobu HAYAKAWA Bangkok Research Center, Japan External Trade Organization, Thailand)

  • Fukunari KIMURA

    (Fukunari KIMURA Faculty of Economics, Keio University, Japan Economic Research Institute for ASEAN and East Asia (ERIA))

  • Hyun-Hoon LEE

    (Hyun-Hoon LEE Department of International Trade and Business, Kangwon National University, Korea)

In this paper we empirically investigate the effects on inward FDI of various components of political and financial risk. We also examine the relationship between inward FDI and not only the level of these risks but also their changes over time. Two kinds of findings are noteworthy. One is that among the political and financial risks, only the political risk is associated with the FDI inflow. Specifically, the change in the level of political risk affects FDI inflows, while the initial level of political risk does not. The other is that, particularly in the case of developing countries, payment delays, contract expropriation, and corruption are negatively associated with the FDI inflow. However, significant improvement leads to increased FDI inflow, even if initial levels are high.

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Paper provided by Economic Research Institute for ASEAN and East Asia (ERIA) in its series Working Papers with number DP-2012-03.

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Length: 32 pages.
Date of creation: 01 Feb 2012
Date of revision:
Handle: RePEc:era:wpaper:dp-2012-03
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  1. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 303-354.
  2. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
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  4. Laura Resmini, 2000. "The Determinants of Foreign Direct Investment in the CEECs: New evidence from sectoral patterns," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(3), pages 665-689, November.
  5. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  6. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
  7. Asiedu, Elizabeth, 2002. "On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?," World Development, Elsevier, vol. 30(1), pages 107-119, January.
  8. Fathi Ali & Norbert Fiess & Ronald MacDonald, 2008. "Do Institutions Matter for Foreign Direct Investment?," Working Papers 2008_26, Business School - Economics, University of Glasgow.
  9. Gastanaga, Victor M. & Nugent, Jeffrey B. & Pashamova, Bistra, 1998. "Host Country Reforms and FDI Inflows: How Much Difference do they Make?," World Development, Elsevier, vol. 26(7), pages 1299-1314, July.
  10. Ivar Kolstad & Espen Villanger, 2008. "Foreign Direct Investment in the Caribbean," Development Policy Review, Overseas Development Institute, vol. 26(1), pages 79-89, 01.
  11. Noorbakhsh, Farhad & Paloni, Alberto & Youssef, Ali, 2001. "Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence," World Development, Elsevier, vol. 29(9), pages 1593-1610, September.
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