The Effect of Political Risk on Foreign Direct Investment: A Case of Sub-Saharan Africa (2000-2018)

Abstract

The study was undertaken in an effort to determine the impact of political risk on Foreign Direct Investment (FDI). The study focussed on 26 countries in the Sub Saharan Region of Africa over a span of 19 years from 2000-2018. Despite numerous studies on the determinants of FDI inflows to Sub-Saharan Africa, the effect of political risk had not received much attention owing primarily to lack of data. For political risk data, the study utilised secondary data obtained from the International Country Risk Guide (ICRG) given by the Political Risk Services (PRS) Group. The research used the Generalized Methods of Moments (GMM) model and its associated diagnostics to analyse the relationship between political risk and foreign direct investment. The results of the study showed that political risk was a significant determinant of foreign investment inflows. It was found that an increase in political risk in a host country environment resulted in a negative impact on inward foreign direct investment. There was need for host countries to build democratic institutions in order to attract Foreign Direct Investment.