Political Risk, Macroeconomic Uncertainty, and the Patterns of Foreign Direct Investment

Abstract

While recent times have witnessed a surge of foreign direct investment (FDI) inflows into the developing world, these inflows remain below optimal levels. In this article, we use data on African, Asian, and Latin American economies to investigate the role of political risk and macroeconomic uncertainty—stemming from the foreign exchange market—as determinants of the patterns of FDI. Moreover, given the low share of FDI going into African economies, we place special attention on the differential impact of these variables on FDI flows into Africa. The results of this study point to the fact that, in general, political risk and exchange rate uncertainty reduce FDI. However, it is shown that the impact of political risk is more severe for FDI flowing into African economies.