Foreign Direct Investment, Financial Development and Political Risks

Nabamita Dutta () and Sanjukta Roy ()

MPRA Paper from University Library of Munich, Germany

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 (search for similar items in EconPapers)
JEL-codes: C23 F23 O16 (search for similar items in EconPapers)
Date: 2008-05-10, Revised 2008-08-05
New Economics Papers: this item is included in nep-pol
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Citations: View citations in EconPapers (22)

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Journal Article: Foreign direct investment, financial development and political risks (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:10186

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