THE ROLE OF POLITICAL STABILITY IN FOREIGN DIRECT INVESTMENT ATTRACTION: CROSS-COUNTRY ANALYSIS

Abstract

This study is devoted to the evaluation and scrutiny of political stability as a determinant of foreign direct investment (FDI) inflows to different countries. The primary objective of the research is to estimate the impact and influence of various indicators of political stability on foreign direct investment inflows. The analysis is delivered based on a database on cross-country FDI inflows of 66 FDI-importer countries and 98 FDI-exporter countries, in the period between 2001-2018. This article uses the assumption that the impact of political stability might be different for both the groups of developed and developing countries. As the developed economies have higher political stability, they tend to attract larger amounts of foreign direct investment compared to developing economies, where the political situation can be less stable. Furthermore, the estimation applies the gravity approach, while the main method used for the econometric calculations is the Pseudo Poisson Maximum Likelihood (PPML) regression. The outcome revealed that in most cases the indicators of political stability had a positive impact on the foreign direct investment inflows. However, the results are not constant for all groups of countries. Therefore, if a developed country is an importer of investment, then most of the indicators of political stability become significant and have a positive influence on the foreign direct investment. At the same time, if the importer is a developing country, then for the investor-developed economy, political stability becomes a significant factor. Similarly, if the FDI-exporter is a developing economy, then determinants of political stability are insignificant. Based on these results, possible recommendations for refined government policies can be suggested.