Political Risk and Diaspora Direct Investment

Abstract:     
I argue that diasporans are better informed about the political and economic situation in the homeland than are other potential foreign investors; that higher levels of information allows diaspora investors to anticipate and respond to changes in risk more effectively; and that this makes migrant-induced FDI more sensitive to political risk than is other FDI. I conduct empirical analysis on a dataset of bilateral FDI flows from 30 OECD countries to 105 developing countries from 1994-2008: I find that migrant-induced FDI is more sensitive to political risk than is other FDI, and particularly that migrant-induced FDI is more sensitive to decreases in political risk. This has three central implications. First, it is inappropriate to pool across all types of foreign direct investors when analyzing how they experience and respond to political risk. Second, it is diasporans’ access to information, rather than their non-pecuniary motivations directly, that drives the causal relationship between migrant stocks and FDI flows. Third, diaspora direct investment has the potential to motivate and sustain governance reform and stabilization in fragile states, but it is no more likely than other FDI to substitute for, or precede, these improvements.

Number of Pages in PDF File: 36

Keywords: Diaspora, Migrant, FDI, Investment, Political Risk

JEL Classification: F21, F22

working papers series