Understanding the Relationship between FDI and Political Risk

How does foreign direct investment affect political risk? The body of literature on foreign direct investment (FDI) and political risk is well established and continues to grow because of the increasing significance these two institutions have in our globalizing world. The focus has been put on the creation of different economic models used to forecast and assess political risk for foreign investment purposes. Only recently has there been exploration of the reversed relationship: an investigation of the effects FDI has on determinants of political risk. The current study furthers this new research, but focuses on the effects FDI has on political risk as a whole. Information is collected from the World Bank, UNCTAD and the ICRG’s political risk index for a selection of countries to see if there is significant correlation between political risk and FDI from the period of 1984-2012 through regression analysis. To amend a criticism of the previous literature, government regime type, development stage and the concept of time are all taken into consideration. The analysis poses questions and topics for new research based on the changing FDI arena; where developing countries are now leading global FDI flows and have since 2012