Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83436
Authors: 
Benáček, Vladimír
Lenihan, Helena
Andreosso-O'Callaghan, Bernadette
Michalíková, Eva
Kan, Denis
Year of Publication: 
2012
Series/Report no.: 
IES Working Paper 24/2012
Abstract: 
This paper examines theoretically and empirically the extent to which the decision by foreign firms to invest in a group of countries is influenced by economic factors, as opposed to political risk and institutional performance. We consider the importance of these factors as drivers of foreign direct investment (FDI) for 32 European countries (subsequently divided into three pooled clusters) by means of panel regression techniques in two specifications over the 1995-2008 period. Our results suggest that risk and institutional factors considered in both static and dynamic perspectives significantly influence the behaviour of investors. Policies and institutions that vary widely between countries modify their decision-making, so that the purely economic factors have different statistical significance and impacts on the intensity of FDI, as was revealed by clustering countries into three groups according to levels of economic maturity. Additionally, not all factors of risk have an identical impact on FDI decisions in particular groups of countries. However, we find that as measures of political risk, monetary discipline, low regulation, effective government and good education prove to be highly significant for most country groupings. All of these measures reduce political risk and positively affect the level of FDI.
Subjects: 
FDI
Political risk
Economic institutions
Panel regression
European Union
JEL: 
F2
D81
C23
Document Type: 
Working Paper
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