ASYMMETRIC IMPACT OF UNCERTAINTY AND POLITICAL RISK ON FOREIGN DIRECT INVESTMENT: AN EMPIRICAL STUDY OF SOUTH ASIA

Abstract

This study explores the asymmetric impact on FDI in southern Asia of the political risk and macroeconomic policy uncertainty. The Pooled Mean Group (PMG) investigates the impacts on FDI inflows of political risk and macroeconomic policy uncertainty. For this reason, macroeconomic policy uncertainty and political risk indexes are established. The long-term and short-term findings suggest that the negative side of political risk and macroeconomic policy uncertainty affects FDI inflows badly. Openness to trade has a beneficial impact only in the short term on FDI inflows. In the long run, the surplus financial health about a consistent trade liberalization policy has a positive impact. Inflation is detrimental to longterm FDI inflows in the short term. A variable investment profile has a long, positive effect on FDI in the short-term sense. Quality of infrastructure (IQ) has a positive impact on FDI over the short and long term. Further, Labor Force Participation has a positive effect on both short and long-term FDIs. On the other hand, short-term and long-term investment returns have an adverse impact on FDI. In addition to FDI incentive policies, South Asian economies must focus on political and macroeconomic factors.