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GTAP Resource #4707

"Risky Business: Political Instability and Sectoral Greenfield Foreign Direct Investment in the Arab World"
by Burger, Martijn, Elena Ianchovichina and Bob Rijkers

How does political instability affect the level and composition of foreign direct investment (FDI)? The answer to this question has important implications for countries’ development trajectories since not all types of FDI are considered equally conducive to economic growth. Alfaro (2003) demonstrates that the growth spillovers associated with FDI vary across sectors, being positive in manufacturing, ambiguous in the services sector and negative in the primary sector. Her findings help explain why many countries have been especially eager to attract FDI in manufacturing and services (Harding and Javorcik, 2011) and why investments in natural resources are considered a mixed blessing, and even a curse (Sachs and Warner, 2001).

Existing studies of the effect of political instability on investment have focused mostly on aggregate relationships. They typically document a strong negative relationship between political instability and aggregate investment (Alesina and Perotti, 1996), foreign direct investment (Busse and Hefeker, 2007; Daude and Stein, 2007), and growth (Barro, 1991; Alesina et al., 1996). However, some authors find no significant or even positive effects and argue that political unrest and institutional quality are not important determinants of investment flows (Noorbakhsh et al., 2001; Campos and Nugent, 2003; Blonigen and Piger, 2014). In specific instances, some foreign companies find it especially advantageous to invest during periods of instability (Guidolin and La Ferrara, 2007).

One possible explanation for the divergent results is that the effect of political instability on FDI varies across sectors. To start with, resource-seeking multinationals may have limited opportunities for investment due to the geographically constrained availability of resources. Second, investments may differ in the degree to which they are reversible and in the extent to which their profitability hinges on first-mover advantages. Third, the cost of finance l...

Resource Details (Export Citation) GTAP Keywords
Category: 2015 Conference Paper
Status: Published
By/In: Presented at the 18th Annual Conference on Global Economic Analysis, Melbourne, Australia
Date: 2015
Created: Ianchovichina, E. (4/14/2015)
Updated: Ianchovichina, E. (4/14/2015)
Visits: 1,097
- Foreign direct investment
- Middle East
- North America

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