Political Risk, Institutions and Foreign Direct Investment: How Do They Relate in Various European Countries?
Abstract
Uncertainty and risk are inherent to economic environments, particularly those characterised by high capital mobility, worldwide financial shakeouts and the restructuring of international ties (as in the case of the current crisis). Contemporary economics stresses the importance of institutions, as the 'rules of the game' in a society guiding and reducing uncertainty and ransaction costs in human interactions (Stiglitz, 1998).
The real performance of economic institutions differs widely among countries, underpinning or impeding the businesses and their transaction costs. By adopting a cross-country comparative approach, the current paper empirically tests the extent to which decisions to invest in a given group of countries (as opposed to another group) are influenced by actual or perceived risk factors associated with investment ceteris paribus.