In today's increasingly globalized world, foreign direct investment (FDI) is a hotbed for discussion. Numerous studies have been undertaken regarding FDI, its determinants…
In today's increasingly globalized world, foreign direct investment (FDI) is a hotbed for discussion. Numerous studies have been undertaken regarding FDI, its determinants and benefits, but very few works provide importance to the effect of political risk on the inflow of FDI. Some papers introduce institutional or governance issues in determining FDI inflow, but a comprehensive framework in this respect is non-existent. With this end in view, the authors take 146 countries worldwide over a period of 1984-2009 and then classify countries as OECD or non-OECD members to see whether there is any difference in the nature of the effect. The study keeps other possible determinants of FDI – market size, growth rate of real GDP, trade openness, infrastructural facilities as control variables while considering the effect of underlying political risk factors in deterring the FDI.
This paper looks at the effect of political risk on FDI by using a systematic approach of factor analysis, in reducing the number of variables into their underlying factors and then generating factor scores. Then it uses a panel regression approach combined with factor analysis to examine which particular aspect of political risk contributes more towards deterring FDI inflow.
The empirical results of this study refute the conventional notion that government failure is the primary contributing factor for poor FDI inflow. Rather, cultural conflict and the attitude of the partner country towards the host country are found to be mostly responsible for deterring FDI inflow. The result holds significantly even after controlling for traditional determinants regardless of whether it is an OECD member country or not.
It is not just governance failure but the cultural factors and development partners' attitude about the country which mostly determines FDI inflow.
This is the first paper which combines the factor analysis in a panel regression framework to examine the impact of political risk on FDI inflow.
Pakistan suffered with the menace of terrorism for long and become a front line state in the “War on Terror”. Terrorism shattered Pakistan economy and rendered her…
Pakistan suffered with the menace of terrorism for long and become a front line state in the “War on Terror”. Terrorism shattered Pakistan economy and rendered her external sector vulnerable to instability and uncertainties.
Therefore, using system generalized method of moment (GMM), this paper investigates the impact of foreign direct investment (FDI) on exports, imports and trade deficit in the face of unabated terrorism in Pakistan.
The findings of the paper suggest that as terrorism in Pakistan increased, FDI contribution to Pakistan exports decreased while FDI contribution to Pakistan imports significantly increased. Terrorism also disrupted the chain of local production and increased Pakistan reliance on imports. Thus terrorism widened Pakistan trade deficit of Pakistan and expose Pakistan to external imbalances.
Despite rise in organized acts of terrorism and its adverse impact on various departments of economy, hardly any study bothers to check its impact on trade and investment nexus. This is the first study of its nature that looks deep down to understand how terrorism affects the relation of major economic variables.