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Economies 2017, 5(3), 22; doi:10.3390/economies5030022

The Relevance of Political Stability on FDI: A VAR Analysis and ARDL Models for Selected Small, Developed, and Instability Threatened Economies

1
Business and Economics Department, University North, Koprivnica 48000, Croatia
2
University College of International Relations and Diplomacy Dag Hammarskjöld, Zagreb 10000, Croatia
*
Author to whom correspondence should be addressed.
Academic Editor: Eric Rougier
Received: 27 April 2017 / Revised: 9 June 2017 / Accepted: 13 June 2017 / Published: 22 June 2017
(This article belongs to the Special Issue FDI and Development: Emerging Issues)
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Abstract

This paper studies the relevance of political stability on foreign direct investment (FDI) and the relevance of FDI on economic growth, in three panels. The first panel contains 11 very small economies; the second contains five well-developed and politically stable economies with highly positive FDI net inflows, while the third is a panel with economies that are prone to political violence or targeted by the terrorist attacks. We employ a Granger causality test and implement a vector autoregressive (VAR) framework within the panel setting. In order to test the sensitivity of the results and avoid robust errors, we employ an ARDL model for each of the countries within every panel. Based upon our results, we conclude that there is a long-term relationship between political stability and FDI for the panel of small economies, while we find no empiric evidence of such a relationship for both panels of larger and more developed economies. Similarly to the original hypothesis of Lucas (1990), we find that FDI outflows tend to go towards politically less stable countries. On the other hand, the empiric methodology employed did not find such conclusive evidence in the panels of politically more developed countries or in the small economies that this paper observes. View Full-Text
Keywords: political stability; VAR analysis; Granger causality test; investor confidence; ARDL analysis political stability; VAR analysis; Granger causality test; investor confidence; ARDL analysis
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Kurecic, P.; Kokotovic, F. The Relevance of Political Stability on FDI: A VAR Analysis and ARDL Models for Selected Small, Developed, and Instability Threatened Economies. Economies 2017, 5, 22.

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