An Empirical Study on Country Risk as A Predictor of Market Entry Decisions: Impact of Political, Economic and Financial Risks on FDI Inflows of Horn of Africa and Middle East North Africa Region (MENA)

Abstract

This study examines how risks affect firm’s entry to the market and operations in foreign countries. Based on a critical literature review, key risks were identified which compromise focus area of current study. We have conceptualized the decision of firms to enter foreign market and attractiveness of Mena and Horn region as a country risk- FDI inflow relationship. The analysis was performed on a macroeconomic level. The country risks include political risks, financial risks and economic risks. A quantitative study encompassing inferential statistical analysis was utilized. The Country risks data was sourced from International Country Risk Guide (ICRG), whereas the FDI data has been collected from World Bank database. The results derived by using multiple regression analysis showed there are significant relationship between the country risks, and FDI inflows. The findings therefore imply that FDI levels in countries, and decision of market entry as well as business operations are significantly affected by political, financial, and economic risks of the host country. Moreover, the study suggests that firms need to increase the risk awareness and prepare risk management plans to minimize the occurrence of risks. There is a real need for companies to recognize, plan for and manage risks as a part of their strategic planning and everyday business operations. This becomes particularly evident in unfamiliar environments with increased risks, such as foreign markets. The problem still exists as managers of companies do not spend sufficient time on risk preparation and only deal with the consequences after risk occurs. Our study findings have implications for entrepreneurs, firms, and governments.