Does the Political Environment Affect Inflows of Foreign Direct Investment? Evidence from Emerging Markets

Abstract

The main aim of the paper is to identify and quantify the infl uence of the political environment on the infl ows of foreign direct investment in emerging markets. The paper defi nes emerging markets as Middle Income Countries according to the evaluation of the World Bank. Our sample of countries contains 78 states. The reference period focuses on the period of 1996-2012 due to data availability. The evaluation of the political environment is based on three dimensions: the quality of democracy, political instability and the level of corruption, which are related to three subcomponents of the concept, Governance Matters, provided by the World Bank. The paper distinguishes between two types of political instability omitted in thematic literature, elite and non-elite. The former represents non-violent instability (minority governments, tension related to the holding of elections) while the latter deals with violent forms of instability (civil wars, coups, ethnic and religious riots). The paper uses panel data regression analysis for the purpose of identifi cation and quantifi cation. The research uses fi xed eff ects model with a cluster option. According to the results, the infl uence of the political environment on FDI is not entirely unequivocal in emerging markets; nevertheless, there is a statistically signifi cant dimension -political instability (both parts). The quality of democracy and the level of corruption are signifi cant only in some cases. The paper combines indicators frequently occurring in empirical literature (the Corruption Perception Index, Freedom in the World, Governance Matters) with alternative proxies (the Herfi ndahl Index Government, the Political Terror Scale, the State Fragility Index), which seem to be a perspective for a future research.

Institutional Quality and its Impact on FDI Inflow: Evidence from the EU Member States

“…303-308;Abdella, Naghavi, and Fah 2017, pp. 32-38), the quality of democracy, and political instability (Madr and Kouba 2015, pp. 2017-2026, government effectiveness (Jurčić, Franc, and Barišić 2020, pp.…”