The effect of property rights and political risk to attract foreign direct investment using with PVAR approach

Document Type : Research Article


1 Department of Economics, Urmia University

2 M.A. in Economics, Urmia University


The attract of foreign direct investment for the economies of different countries, especially in the developing countries, is necessary due to the lack of sufficient resources to achieve development aims, as well as the possibility of technology transfer and competitive production. According to the advantages of foreign capital inflows in terms increase of productivity, simultaneous entry of technology and competitive production, this kind of investment has always been the attention of economic researchers and planners. But the level of entry of this capital can be to a large extent, associate with the legal structure and political risks of societies. Political forces in a given society may sabotage for the profitability or endeavors of multinational corporations to achieve their other goals that will have a negative impact on them. Also, if a country seeks to attract foreign investment, it must protect property rights. Of course, the protection of property rights requires cost, but the important point is that the burden of supporting property rights for countries with strong institutional institutions is far less that of countries with lower institutional quality.
 Hence, the present study, considering the global changes and current situation in the economies of developing countries, examines the effect of protecting property rights and political risks on the attraction of foreign direct investment in the 52 selected developing countries during the 1990-2015 period by applying the Panel VAR approach. In in this study, than Internal conflict Index was used as a representative of the country's political risk index that provided by the International Country Risk Guide Methodology. Also, than index provided by the Fraser Institute was used for property rights.To use this method first, we investigates stationary data with Im et al (2003) test. After ensuring that the variables are stationary, using the lowest amount of information criterias, the optimal lag was selected. Then the stability test was performed. After testing the stability of the model, in order to investigate the effect of the shock of a variable on the other variable in model, the analysis of impulse response functions and the error variance decompositions of variables are investigated.
The results of the study demonstrate that, due to a positive shock in the political situation in developing countries, the attraction of foreign direct investment is strongly reacts positively. The positive reaction of the FDI to political risk shocks from the second to the seventh year has slowed down with a gentle slope and it’s indicative of that the consequences of the existence of safe conditions in host countries could for a long time, lead to an increase in foreign investment in these countries. As well as, due to a positive shock in the laws of the developing countries, the attraction of foreign direct investment is increase so that, the positive reaction of the FDI to the positive shock of property rights indicates that the existence of laws based on increasing ownership of property in host countries is up to five period that it could be lead to an increase in foreign investment in those countries. In addition, the findings indicate that in developing countries, among selected variables, the impact of political risk shocks and GDP growth is greater than the impact of other variables such as property rights shocks and the degree of openness trade on attracting foreign investment.
Therefore, in order to increase their share of the international flow of foreign direct investment, officials in developing countries need to high attention to the improvement and stability of their political conditions. Also, considering the effects of the degree of trade openness on FDI, paying attention to commercial freedom and facilitating the flow of imports and exports can be able regarded as a positive sign for foreign investors.


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