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Political Risk, Institutions and Foreign Direct Investment: How Do They Relate in Various European Countries?

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Abstract

This paper examines theoretically and empirically the extent to which the decision by foreign firms to invest in a group of countries is influenced by economic factors, as opposed to political risk and institutional performance. We consider the importance of these factors as drivers of foreign direct investment (FDI) for 32 European countries (subsequently divided into three pooled clusters) by means of panel regression techniques in two specifications over the 1995-2008 period. Our results suggest that risk and institutional factors considered in both static and dynamic perspectives significantly influence the behaviour of investors. Policies and institutions that vary widely between countries modify their decision-making, so that the purely economic factors have different statistical significance and impacts on the intensity of FDI, as was revealed by clustering countries into three groups according to levels of economic maturity. Additionally, not all factors of risk have an identical impact on FDI decisions in particular groups of countries. However, we find that as measures of political risk, monetary discipline, low regulation, effective government and good education prove to be highly significant for most country groupings. All of these measures reduce political risk and positively affect the level of FDI.

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  • Vladimír Benácek & Helena Lenihan & Bernadette Andreosso-O’Callaghan & Eva Michalíková & Denis Kan, 2012. "Political Risk, Institutions and Foreign Direct Investment: How Do They Relate in Various European Countries?," Working Papers IES 2012/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2012.
  • Handle: RePEc:fau:wpaper:wp2012_24
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    Cited by:

    1. Husam Rjoub & Mehmet Aga & Ahmad Abu Alrub & Murad Bein, 2017. "Financial Reforms and Determinants of FDI: Evidence from Landlocked Countries in Sub-Saharan Africa," Economies, MDPI, Open Access Journal, vol. 5(1), pages 1-12, January.
    2. repec:eee:wdevel:v:103:y:2018:i:c:p:72-87 is not listed on IDEAS
    3. Lucie Davidova & Vladimir Benacek, 2014. "Determinants of Austrian International Trade: Analysis Based on the Gravity Model," Working Papers IES 2014/15, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2014.
    4. Álvarez, Inmaculada C. & Barbero, Javier & Rodríguez-Pose, Andrés & Zofío, José L., 2018. "Does Institutional Quality Matter for Trade? Institutional Conditions in a Sectoral Trade Framework," World Development, Elsevier, vol. 103(C), pages 72-87.

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    Keywords

    FDI; Political risk; Economic institutions; Panel regression; European Union;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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