The Effects of Political and Economic Risk on FDI

Abstract

Foreign direct investments (FDI) are becoming the key element in achieving development in developing countries. On the global scale, FDIs reached the level of $1,75 trillion back in 2016. FDI also brings lots of economic benefits to host countries. However, beyond these economic indicators, political structure and social characteristics of a host country also have special importance for investors' decisions. Political risk indicators cover mainly democratization level, political/government instability, war, immigration problems, problems with neighboring countries, internal and external conflicts, corruption level, military and religious influence on politics, law and order, ethnics tensions, property rights protection, national security and geographic situation - all of these factors also deeply affect decisions on FDI. Also, some basic social characteristics for host countries can play the catalyzer role for FDI, such as literacy rate, education opportunities, etc. The aim of this study is to examine theoretically the relationship between political and economic risks on the one hand with FDI on the other. It is aimed to show the theoretical background for the political and economic risk factors. Statistical figures on the FDI trends worldwide will be also presented.