Foreign Direct Investment, Financial Development and Political Risks

Journal of Developing Areas, 2011, 44(2), 303-327

25 Pages Posted: 24 Jan 2013

See all articles by Nabamita Dutta

Nabamita Dutta

University of Wisconsin, La Crosse

Sanjukta Roy

World Bank

Date Written: 2011

Abstract

Financial development is definitely a determinant of the extent of foreign direct investment (FDI) inflow into an economy. Yet, the contribution of financial development (FD) can be dependent on the political situation of the recipient nation. Higher political stability aids financial institutions to reap the benefits of FDI efficiently. Our paper empirically investigates the role of political risk in the association of FDI and FD. Using a panel of 97 countries, we show the relationship to be strictly non-linear. The impact of FD on FDI becomes negative beyond a threshold level of FD. However, we do find political risk factors to be affecting the relationship by altering the threshold level of financial development.

Keywords: Foreign Direct Investment, Financial Development, Political Risks

JEL Classification: C23, F23, O16

Suggested Citation

Dutta, Nabamita and Roy, Sanjukta, Foreign Direct Investment, Financial Development and Political Risks (2011). Journal of Developing Areas, 2011, 44(2), 303-327. Available at SSRN: https://ssrn.com/abstract=2206384

Nabamita Dutta (Contact Author)

University of Wisconsin, La Crosse ( email )

Dept. of Economics, 1725 State Street
La Crosse, WI 54601
United States
6087855294 (Phone)

Sanjukta Roy

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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