Do Geopolitical Risks and Political Stability Drive Foreign Direct Investments? New Evidence from Dynamic Panel CS-ARDL Model

In this research, we aim to highlight the impact of geopolitical risks and political stability on investment flows directed towards 10 high-risky countries in the relevant database of Caldara and Icaivello (2018) for the period from 2000 to 2022 with yearly data. On that note, we employed Durbin-Hausman panel cointegration test to check long run relationship. Than, we estimate co-integration parameters (coefficients) employing CS-ARDL method to avoid estimation problem that arise from cross-section dependency and slope homogeneity. The results reveal that geopolitical risks have negative effect on Foreign Direct Investment (FDI) for both short and long term. The findings also prompt us to conclude that political stability in the host country has significant impact on inward FDI in the long run. Cross-section dependency and delta tests indicate that geopolitical risk generates heterogeneous effect on host countries. In the last section, robustness check with alternative estimators and Granger non-causality validates the main results at conventional confidence level. To this end, policy makers may consider strengthening international institutions and organizations, giving importance to peaceful initiatives, multilateral agreements (commercial or economic), and diplomatic negotiations, as significant policy tools to increase investment inflows by enhancing stability, transparency, and predictability in governance.