Impacts of Political Risk and Macroeconomics Factors Towards Foreign Direct Investment in Developing Countries

Nur Izwan Faris Nur Mohamad; Jaizah Othman; Raudhah Mohd Tarmizi; Nurul Nadia Mohamad Hamidi

doi:10.56225/ijfeb.v2i1.47

Authors

Nur Izwan Faris Nur Mohamad Department of Finance and Accounting, Faculty of Business Management and Professional Studies, Management and Science University, Selangor, Malaysia
Jaizah Othman Department of Finance and Accounting, Faculty of Business Management and Professional Studies, Management and Science University, Selangor, Malaysia
Raudhah Mohd Tarmizi Department of Finance and Accounting, Faculty of Business Management and Professional Studies, Management and Science University, Selangor, Malaysia
Nurul Nadia Mohamad Hamidi Department of Finance and Accounting, Faculty of Business Management and Professional Studies, Management and Science University, Selangor, Malaysia

DOI:

https://doi.org/10.56225/ijfeb.v2i1.47

Keywords:

foreign direct investment, political risk, macroeconomics factors, developing countries

Abstract

This study examines the relationship between macroeconomic factors and foreign direct investment (FDI) inflows in developing countries. The data from the World Bank covers 21 years, from 2000 to 2020 was analyzed using the panel regression approach with E-Views. Panel regression analysis, including model selections and diagnostics, is used for inferential analysis. The main contribution of this study is the influence of political factors on FDI inflows. Political stability and corruption control are technically the most important conditions for FDI inflows in developing countries and were introduced in this study. This study found a positive relationship between GDP growth rate, imports, inflation, and corruption index with FDI inflow, confirmed by previous studies. The study also implies that the exchange rate, exports, and political stability have a negative relationship with the level of FDI in developing countries. In addition, the study found that GDP growth rate, imports, and exports significantly impact FDI inflows in developing countries, while the other variables are not significant. In other words, this result shows that macroeconomic and political factors such as import, export, exchange rate, corruption control, and political stability impact FDI inflows. Moreover, this paper provides policy recommendations to support developing countries' economies by attracting FDI and increasing its inflow.

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