Chapter 10 Impact of Risk Perceptions on Foreign Direct Investment (FDI) Inflows: A Study of Emerging Economies

Financial sustainability in emerging market economies crucially depends on stable foreign capital inflows as these countries lack adequate domestic capital and sophisticated technology. This study attempts to examine the impact of major political risk factors in the emerging market economies along with basic economic fundamentals such as institutional variables like per capita electric consumption, trade openness, and real rate of interest. We have followed a static panel data approach in studying the impact of these crucial variables in Foreign Direct Investment (FDI) inflows in 15 major emerging economies for the period 2000–2014. Risk perceptions, i.e., political risk data, have been collected from the International Country Risk Guide (ICRG) provided by the Political Risk Services (PRS) Group. In our research purpose, we have considered dependent variable as FDI inflows for 15 emerging countries during the period 2000–2014, which are drawn from the United Nations Conference on Trade and Development ( UNCTAD, 2014, 2015 ) FDI database. Our results demonstrate that there are six subcomponents of risk perception (political risk) which are statistically significant in explaining variation in FDI inflows of the major emerging countries. The results show that government stability, socioeconomic conditions, religious tension, and bureaucracy quality have a positive impact on FDI inflows of emerging countries, whereas internal conflict and law and order have a negative impact on FDI inflows of these countries. Stable government is more attractive to foreign investors. Again, an improvement in the socioeconomic conditions is positively related with FDI inflows in emerging countries. Decreasing bureaucracy leads to a reduction in corruption, and assists expanding FDI flows in the emerging country.