How Does Country Risk Matter for Foreign Direct Investment?

In this paper we empirically investigate the effects on inward FDI of various components of political and financial risk. We also examine the relationship between inward FDI and not only the level of these risks but also their changes over time. Two kinds of findings are noteworthy. One is that among the political and financial risks, only the political risk is associated with the FDI inflow. Specifically, the change in the level of political risk affects FDI inflows, while the initial level of political risk does not. The other is that, particularly in the case of developing countries, payment delays, contract expropriation, and corruption are negatively associated with the FDI inflow. However, significant improvement leads to increased FDI inflow, even if initial levels are high.