THE EFFECTS OF POLITICAL RISK AND ECONOMIC POLICY UNCERTAINTY ON FOREIGN DIRECT INVESTMENTS: A PANEL COINTEGRATION ANALYSIS FOR SELECTED EU COUNTRIES

Political risk and economic policy uncertainty have an impact on many macroeconomic variables in the economy. One of the most crucial of these variables are foreign direct investment. Foreign investors refrain from investing in the economies of high policy uncertainty and direct their investment to the economies where there is political stability and no uncertainty in the economy. This study attempted an econometric model to illustrate the long-run relationships among political risk, economic policy uncertainty and foreign direct investment inflows of five EU countries during the period 2001-2014. Westerlund and Edgerton (2007)'s panel LM bootstrap panel cointegration test is applied to discover empirical support for the presence of the cointegration relationship between the variables.  Finally, the cointegration coefficients are estimated by using the Pesaran (2006)'s CCE estimator. The empirical findings show positive coefficients for political stability in Germany, France, England and Spain while statistically significant and negative coefficients for economic policy uncertainty in France and Spain. In addition, the variable of economic freedom has statistically significant and positive effect on foreign direct investments for only England and the openness of trade variable has statistically significant and positive effect on it for Spain and Italy.