خطر سیاسی، نهادها و سرمایه گذاری مستقیم خارجی

The paper explores the linkages among political risk, institutions, and foreign direct investment inflows. For a data sample of 83 developing countries covering 1984 to 2003, we identify indicators that matter most for the activities of multinational corporations. The results show that government stability, internal and external conflict, corruption and ethnic tensions, law and order, democratic accountability of government, and quality of bureaucracy are highly significant determinants of foreign investment inflows.

Economic development depends to a large extent on profitable investment. Having access to foreign capital allows opportunities that otherwise would not be available. Recent experience with open capital accounts in emerging and developing economies, however, have proved to be a mixed blessing, as it is becoming increasingly clear that not all types of capital imports are equally desirable. Short-term credits and portfolio investments are subject to sudden reversal if the economic environment or just the perception of investors changes, giving rise to possible financial and economic crises. It is therefore frequently advised that those countries should primarily try to attract foreign direct investment (FDI) and be careful about accepting other sources of finance (Prasad et al., 2003). Direct investment is much more resilient to crises. Therefore the question is what can countries do to attract more of such capital flows? FDI in developing countries has increased significantly over the last 25 years. Total FDI rose from some US $4 billion in 1980, to US $182 billion in 1999, before falling back to US $152 billion in 2003 (Fig. 1). As a share of Gross Domestic Product (GDP), we have observed an enormous increase in the significance of FDI. In developing countries, defined as low- and middle-income countries with a Gross National Income (GNI) per capita of US $9075 or less,1 this share increased from a very low figure of some 0.1% in 1980, to more than 3% in 1999, and then declined to 2.2% in 2003. Various determinants have been identified that influence location of investment of multinational corporations. Theoretical and empirical studies have looked at the characteristics and behaviour of multinationals and have identified management skills, economies of scale, and innovative product technologies as important determinants of FDI.2 Market structure, the dynamics of oligopoly, political and economic stability, market size and growth, infrastructure, exchange rate risks, labour costs, and more have been singled out as additional influences that can explain FDI. Rather than analysing a broad range of heterogeneous determinants of FDI, this paper focuses on various aspects of political risk, and tries to identify those political risk components that matter most for multinationals. Political risk is related to the risk that a sovereign host government will unexpectedly change “the rules of the game” under which businesses operate (Butler and Joaquin, 1998). Changes in government policy and/or political institutions could affect investment behaviour of multinational corporations, as the risk premium incorporated in any investment project and, therefore also the location decision is influenced by political risk. While the economic determinants of FDI flows to developing countries have been analysed to a considerable degree, it is somewhat astonishing that the importance of changes in political institutions and of other relevant policies in host countries has received rather limited attention. In the 1990s, most research on the influence of policy-related variables on FDI flows consisted of international cross-country studies. Within this framework, it has been found, for example, that there is a negative link between institutional uncertainty and private investment (Brunetti and Weder, 1998), a positive relationship between FDI and intellectual property protection (Lee and Mansfield, 1996), and there is a negative impact of corruption on FDI flows (Wei, 2000).3 Despite attempts to distinguish other influences, the results of these cross-country studies may well reflect other non-measured influences that vary across countries but not over time. For this reason, the results of such studies may not apply to relevant changes in policy-related variables over time. In principle, since the bias in the estimates of such effects could be in either direction, it is important to supplement the cross-section studies with time-series estimates. The first such attempt was by Jun and Singh (1996), who regressed an aggregated indicator for political risk based on a number of sub-components and several control variables on the value of foreign direct investment inflows. For their data sample of 31 developing countries, the political risk index is statistically significant and the coefficient implies that countries with higher political risk attract less FDI.4 Likewise, Gastanaga et al. (1998) examined the link between various political variables and foreign investment inflows. They found that lower corruption and nationalisation risk levels and better contract enforcement are associated with higher FDI inflows. Yet they state that their findings do not always apply, which may be due to the relatively small country sample of 22 developing countries. Henisz (2000) showed that multinationals face an increasing threat of expropriation if political hazard in the host country increases. However, the degree of risks depends on the strategic behaviour of the multinational, which may partner with host-country firms that have a comparative advantage in interactions with the host-country government.5Harms (2002) estimated the impact of financial risk on equity investment flows, that is, the sum of FDI and portfolio investment, to developing countries. Using a panel data set of 55 developing countries and the period 1987 to 1995, he found that lower financial risk is associated with an increase in FDI and portfolio investment. Egger and Winner (2005), on the other hand, found for a sample of 73 countries over the period 1995 to 1999 a positive linkage between corruption and FDI. In the presence of excessive regulation and other administrative controls, they propose that corruption may act as a “helping hand” to encourage FDI inflows. Recently, several studies have analysed the relationship between fundamental democratic rights and FDI. Using different econometric techniques and periods, Harms and Ursprung (2002), Jensen (2003), and Busse (2004) found that multinational corporations are more likely to be attracted where there is democracy. Li and Resnick (2003), on the other hand, argue that competing causal linkages are at work. They found that democratic rights lead to improved property rights protection, which in turn increases foreign investment. Apart from this indirect impact on FDI, increases in democracy may reduce FDI. These studies use pooled time-series analysis, but not all of them account for possible endogeneity of the independent variables. Moreover, they often focus on very specific indicators such as democratic rights, omitting a broader range of policy-related variables. The purpose of this paper is to examine a much wider range of indicators for political risk and to identify the relative importance of these indicators for FDI inflows after controlling for other relevant determinants of observed changes in FDI flows. We examine the influences of government stability, socio-economic conditions, investment profile, internal and external conflict, corruption, military in politics, religious tensions, law and order, ethnic tensions, democratic accountability, and the quality of bureaucracy. A number of these political risk components are also linked to the quality of political institutions. Above all, the quality of the bureaucracy is closely associated with the institutional strength of a particular country. Likewise, ensuring law and order and reducing corruption levels are important determinants (and effects) of high-quality institutions. These influences constitute relevant sub-components of an overall assessment of “good governance” (Kaufmann et al., 1999). We therefore empirically investigate the (direct) links between various components of political risk foreign investment flows and the (indirect) links between institutional quality and FDI. The paper is structured as follows: The data set and the variables used in the regressions are presented in the following section. In Section 3 the estimation strategy and the specification of the model are explained. In order to mitigate problems arising from either pure cross-section or pure time-series analyses, we use both methods to estimate the impact of policy-related variables. With respect to the panel analysis, we employ two different econometric techniques, a country fixed-effects model and the Arellano–Bond generalised method of moments (GMM) estimator. The panel data analysis with country fixed-effects approach allows us to distinguish more systematically between the effects of policy changes and other less variable elements of the investment climate on FDI over time as well as across countries. The Arellano–Bond GMM dynamic panel estimator addresses the problem of autocorrelation of the residuals, as the lagged dependent variable is included as an additional regressor, and deals with endogeneity of some of the control variables. Section 4 concludes.

Foreign direct investment is a desirable form of capital inflow to emerging and developing countries because such investment is less susceptible to crises and sudden stops. The goal of this paper has been to explore in detail the role of political risk and institutions in host countries as determinants of foreign direct investment. As we have pointed out, our main contribution is not to find new and provocative policy recommendations but to distinguish several alternative hypotheses about the relative influence of risk premia and institutions. The results of the paper are summarised as follows: First, in the cross-country analysis, covering a period of 20 years, we find only three indicators for political risk and institutions that are closely associated with FDI (government stability, religious tensions, and democratic accountability). Yet this approach, widely used in the literature up to the mid-1990s, neglects changes in the variables of interest over time, which are clearly relevant for the interpretation of the results. Second, we establish more than twice as many statistically significant links in the fixed-effects panel setting. Yet we suggest that even this specification may lead to biased results, due to autocorrelation and endogeneity of the independent variables. Third, when we use the Arellano–Bond GMM dynamic estimator, which effectively addresses both autocorrelation and endogeneity in the time-series analysis, the results show that in particular government stability, internal and external conflicts, law and order, ethic tensions, bureaucratic quality and, to a lesser degree, corruption and democratic accountability are important determinants of foreign investment flows. Based on our results, these political risk and institutional indicators matter the most when multinational corporations confront decisions about where to invest in developing countries.