How Does Country Risk Matter for Foreign Direct Investment?

Using the overall FDI inflows for 89 countries during the period from 1985 to 2007, we empirically investigate the effects on inward FDI of various components of political and financial risk. We examine the effects of not only the level of these risks but also their changes over time. One of the major findings is that among the political and financial risks, only the political risk is adversely associated with FDI inflows. Specifically, not only the initially low level of political risk, but also a decrease in the level of political risk helps to bring a greater amount of FDI inflows. On the other hand, lower financial risk does not attract FDI inflows, especially to developing countries. Among the various components of political risk, in the sample of developing countries only, it is found that internal conflict, corruption, military in politics, and bureaucracy quality are inversely related to inward FDI flows.