Acta Univ. Agric. Silvic. Mendelianae Brun. 2015, 63(6), 2017-2026 | DOI: 10.11118/actaun201563062017

Does the Political Environment Affect Inflows of Foreign Direct Investment? Evidence from Emerging Markets

Michal Mádr, Luděk Kouba
Department of Economics, Faculty of Business and Economics, Mendel University in Brno, Zemědělská 1, 613 00 Brno, Czech Republic

The main aim of the paper is to identify and quantify the influence of the political environment on the inflows of foreign direct investment in emerging markets. The paper defines emerging markets as Middle Income Countries according to the evaluation of the World Bank. Our sample of countries contains 78 states. The reference period focuses on the period of 1996-2012 due to data availability. The evaluation of the political environment is based on three dimensions: the quality of democracy, political instability and the level of corruption, which are related to three subcomponents of the concept, Governance Matters, provided by the World Bank. The paper distinguishes between two types of political instability omitted in thematic literature, elite and non-elite. The former represents non-violent instability (minority governments, tension related to the holding of elections) while the latter deals with violent forms of instability (civil wars, coups, ethnic and religious riots). The paper uses panel data regression analysis for the purpose of identification and quantification. The research uses fixed effects model with a cluster option. According to the results, the influence of the political environment on FDI is not entirely unequivocal in emerging markets; nevertheless, there is a statistically significant dimension - political instability (both parts). The quality of democracy and the level of corruption are significant only in some cases. The paper combines indicators frequently occurring in empirical literature (the Corruption Perception Index, Freedom in the World, Governance Matters) with alternative proxies (the Herfindahl Index Government, the Political Terror Scale, the State Fragility Index), which seem to be a perspective for a future research.

Keywords: political environment, foreign direct investment, emerging markets, governance matters, quality of democracy, political instability, corruption
Grants and funding:

This paper was supported by IGA MENDELU PEF DP011/2015.

Prepublished online: December 26, 2015; Published: January 1, 2016  Show citation

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Mádr, M., & Kouba, L. (2015). Does the Political Environment Affect Inflows of Foreign Direct Investment? Evidence from Emerging Markets. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 63(6), 2017-2026. doi: 10.11118/actaun201563062017
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