Ideological Polarization and Foreign Direct Investment: Insights from Optimal Information Theory

Abstract

Foreign Direct Investment (FDI) significantly influences economic growth, technological advancement, and international market integration. Although traditional determinants such as economic stability, market potential, and institutional quality have been widely studied, the impact of ideological polarization—a deepening ideological divide within societies—remains underexplored. Leveraging Optimal Information Theory (OIT), this paper uses cross-national empirical analysis to investigate the relationship between ideological polarization and FDI inflows and outflows. Findings reveal a consistent negative correlation between ideological polarization and inward and outward FDI, suggesting that heightened polarization increases perceived risk, driving firms toward short-term, domestic-oriented strategies. This research contributes theoretically by introducing OIT to international business literature and practically by offering strategies for firms navigating polarized political environments. The study also underscores the importance of decentralized institutional frameworks in mitigating political risk and enhancing investor confidence.

Keywords: ideological polarization, foreign direct investment, FDI, optimal information