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Foreign Direct Investment, Financial Development and Political Risks

Author

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  • Dutta, Nabamita
  • Roy, Sanjukta

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

  • Dutta, Nabamita & Roy, Sanjukta, 2008. "Foreign Direct Investment, Financial Development and Political Risks," MPRA Paper 10186, University Library of Munich, Germany, revised 05 Aug 2008.
  • Handle: RePEc:pra:mprapa:10186
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    References listed on IDEAS

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    1. Folster, Stefan & Henrekson, Magnus, 2001. "Growth effects of government expenditure and taxation in rich countries," European Economic Review, Elsevier, vol. 45(8), pages 1501-1520, August.
    2. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, pages 115-135.
    3. Felix Rioja & Neven Valev, 2004. "Finance and the Sources of Growth at Various Stages of Economic Development," Economic Inquiry, Western Economic Association International, vol. 42(1), pages 127-140, January.
    4. Nazrul Islam, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1127-1170.
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    Cited by:

    1. Jacob Kolster, 2015. "North Africa - Working paper - Does foreign direct investment improve welfare in North African countries?," Working Paper Series 2162, African Development Bank.
    2. Shah, Mumtaz Hussain, 2016. "Financial development and foreign direct investment: The case of Middle East and North African (MENA) developing nations," MPRA Paper 82013, University Library of Munich, Germany.
    3. Hartwell, Christopher A., 2014. "The impact of institutional volatility on financial volatility in transition economies : a GARCH family approach," BOFIT Discussion Papers 6/2014, Bank of Finland, Institute for Economies in Transition.
    4. Abdelaal Mahmoud, Ashraf, 2010. "FDI, local Financial Markets, Employment and poverty alleviation," MPRA Paper 29717, University Library of Munich, Germany.
    5. Agbloyor, Elikplimi Komla & Abor, Joshua & Adjasi, Charles Komla Delali & Yawson, Alfred, 2013. "Exploring the causality links between financial markets and foreign direct investment in Africa," Research in International Business and Finance, Elsevier, vol. 28(C), pages 118-134.
    6. Mahvish Faran, 2014. "An Impact Assessment of Expected Future Turmoil Risk on FDI: A Panel Data Analysis of Developing Countries," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(2), pages 101-128, July-Dec.
    7. Issouf Soumaré & Fulbert Tchana Tchana, 2015. "Causality between FDI and Financial Market Development: Evidence from Emerging Markets," World Bank Economic Review, World Bank Group, vol. 29(suppl_1), pages 205-216.
    8. repec:kap:iaecre:v:20:y:2014:i:2:p:203-212 is not listed on IDEAS
    9. Gould, David M. & Tan, Congyan & Emamgholi, Amir S. Sadeghi, 2013. "Attracting foreign direct investment : what can South Asia's lack of success teach other developing countries ?," Policy Research Working Paper Series 6696, The World Bank.
    10. Gohou, Gaston & Soumaré, Issouf, 2012. "Does Foreign Direct Investment Reduce Poverty in Africa and are There Regional Differences?," World Development, Elsevier, vol. 40(1), pages 75-95.
    11. Kurul, Zühal, 2017. "Nonlinear relationship between institutional factors and FDI flows: Dynamic panel threshold analysis," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 148-160.
    12. John C. Anyanwu, 2012. "Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 425-462, November.
    13. Farrokh Nourzad & David Greenwold & Rui Yang, 2014. "The Interaction Between FDI and Infrastructure Capital in The Development Process," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(2), pages 203-212, May.
    14. World Bank, 2013. "Trends and Determinants of Foreign Direct Investment in South Asia," World Bank Other Operational Studies 16522, The World Bank.
    15. Donaubauer, Julian & Neumayer, Eric & Nunnenkamp, Peter, 2016. "Financial market development in host and source countries and its effects on bilateral FDI," Kiel Working Papers 2029, Kiel Institute for the World Economy (IfW).
    16. Sjöholm, Fredrik, 2013. "Foreign Direct Investments in Southeast Asia," Working Papers 2013:37, Lund University, Department of Economics.

    More about this item

    Keywords

    Foreign Direct Investment; Financial Development; Political Risks;

    JEL classification:

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

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