Does Risk Matter? Measuring the Effect of Composite Country Risk on Foreign Direct Investment

Abstract

Foreign direct investment has long been acclaimed as a catalyst for economic growth. This paper explores the relationship between the comprehensive risk profile of a country and FDI inflows. Analyzing a dataset of 135 countries covering 1997 to 2016, we measure the significance and duration of this connection. Using panel regression, threshold analysis, panel cointegration analysis, and VAR techniques, we found compelling evidence that reducing a country's composite risk results in a positive and significant increase in FDI inflows. Moreover, this relationship is strong in the near and long-term. The findings of this study suggest potentially important implications on government conduct to reduce composite risk factors to foster economic improvement, especially for middle and low income countries.