The Impact of Political Risk on the Attraction of Foreign Investment

All economists regard investment as the driving force of economic growth, and consider foreign direct investment as a growth and development factor, which brings about update technology and improves the employment level, management capabilities, trade balances and competitiveness. Thus, today the majority of countries try to attract foreign capital. However, before any investment, multinational companies usually assess the situation in the host country, including its political system, which determines how investing companies are dealt with in that country. More importantly, such companies are interested in investment in politically stable conditions. In this paper, political risks hindering foreign investment are explored. It is argued that political risk is a dissuasive factor for foreign direct investment, particularly in the third world countries. In such circumstances, “political risk insurance” can be helpful for attracting foreign capital to developing countries.