Quantative Perspective on Political Risk Analysis for Direct Foreign Investment-A Closer Look

By Stevens, Flumo Y. | Multinational Business Review, Spring 1997 | Go to article overview

Quantative Perspective on Political Risk Analysis for Direct Foreign Investment-A Closer Look


Stevens, Flumo Y., Multinational Business Review


This paper addresses itself first to the argument against the quantitative approach in political risk analysis. Using both regression analysis and correlation analysis on nine different countries, low correlation, if not, lack of statistical relationship between the economic and market indicators and foreign direct investment was found. This is followed by the discussion on major factors ignored in a quantitative framework of political risk analysis. Finally, a general non-market framework for political risk ast is presented. Efforts are made here to expand on the societal and governmental actions that can adversely affect foreign direct investment. This is followed by discussion on strategic management of political risk.

INTRODUCTION

Since the mid 1980's, the emphasis in political risk analysis has shifted from conceptually-oriented studies to a more quantitative orientation. Euromoney (a monthly magazine) uses internal debt, gross domestic product, balance of payments, official and private interest rates, and debt service payments to develop index for political risk evaluations. Business International (BI) also uses credit and market indicators to develop indexes of environmental risk (currently known as country assessment) and Business Environment Risk (BERI) indexes.

Critics argue that quantitative approaches suffer from their inability to include certain conceptual variables. Consequently, they are regarded as potentially ineffective as reliable tools in political risk analysis.

This paper thus addresses itself first to the theoretical issues in political risk assessment, focusing on the statistical interrelationships between economic and market variables and foreign direct investment. This will be followed by discussion of the impact of different environments on the formation of political risk. The intent is to find out whether or not relationships exist between these economic and market variables and foreign direct investment.

METHODOLOGY

To measure the statistical relationship both regression analysis and correlation analysis were conducted. The purpose of regression analysis is to measure the degree to which two or more variables are linearly related. The correlation coefficient measures the strength of the linear relationship between the dependent variable, Foreign Direct Investment (FDI), and the independent variables (economic and market factors).

For this study nine countries classified as lower income and middle income by the World Bank and U.N. were of much interest. Also we wanted a cross section of the various regions of the world to be represented in our sample. In this connection the following countries were selected for the study: Brazil, Poland, Indonesia, Bolivia, Mexico, Nigeria, Portugal, Haiti, and China. According to both the World Bank and the United Nations, China, Haiti, Indonesia, and Nigeria are classified as lower income countries, while Bolivia, Brazil, Mexico, Poland, and Portugal are classified as middle income countries. It is clear that these countries also represent cross sections of various regions of the world.

The variables used in this study are among the variables used by the Euromoney Magazine in developing its political risk index. These variables are Foreign Direct Investment (FDI), Gross Domestic Product (GDP), Balance of Payment (BP), External Debt (ED), Debt Service (DS), Private Interest Rate (PIR), and Official Interest Rate (OIR). The data for these variables were collected from various World Bank and the United Nations reports from the period 1983 to 1991.

The results of the regression analysis are presented in Table 1:

RESULT ANALYSIS

Generally speaking, a reasonable assumption is that there is low correlation between the economic and market credit indicators and foreign direct investment. By the same token an inverse relationship is observed between official interest rate and direct foreign investment in all of the countries included in the study. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Quantative Perspective on Political Risk Analysis for Direct Foreign Investment-A Closer Look
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.