İtobiad (Sep 2023)
Reflections of Geopolitical Risk on Foreign Direct Investments: The Case of Türkiye
Abstract
A way to achieve sustainable economic growth in developing countries is to increase investments with domestic savings. However, not every country has an equal opportunity in terms of domestic savings. The desired level of investment expenditures cannot be reached in countries with a savings gap. In this case, foreign direct investment (FDI) becomes more valuable in meeting countries’ investment needs. Nevertheless, companies may not behave very bravely in their investment actions in other countries. There is a considerable risk and uncertainty avoidance in the nature of investment because uncertainty and risk are accepted as harbingers of instability for a country. Since the main goal of companies is to make a profit, they may start thinking that they will not have the opportunity to make a profit in an unstable economy. Hence, the risk perception in the investment environment must be low for developing countries to become attractive for FDI inflows. Geopolitical risks, as well as economic, political, and strategic risks that countries will be exposed to, are important indicators considered in FDI inflows. Literature research shows that investors are aggressive in investing with a profit appetite and, with exceptions, are sensitive to geopolitical risks. In other words, FDI decreases in countries where geopolitical risks tend to increase. The present study tested the validity of this assumption in the literature for Türkiye. The impact of geopolitical risks on FDI was analyzed with the ARDL Boundary Test Approach for the period 1985-2020. FDI inflows were used as the dependent variable, and the Geopolitical Risk (GPR) Index, a measure of geopolitical risk, was used as the independent variable. Moreover, growth, globalization, and inflation are the other independent variables analyzed. The test results demonstrated the negative effect of the increase in the GPR index on FDI inflows. In terms of the results obtained, the study provides an important perspective on the prioritization of the geopolitical risk factor in the evaluation of foreign investment performance.
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