The effect of political risk on foreign direct investment

Political risk as a phenomenon observed from the viewpoint of multinational corporations appearing in the role of foreign direct investment holders relates to political and regulatory hazards existing in host countries. Multinational corporations consider the country's political risk as one of the most important determinants in making investment decisions. In this respect, the political environment is very important as precondition for stable investment environment. In less developed countries where there are significant risks and costs in the operations of multinational corporations, political risk is a significant factor in making investment decisions. Political factors in host countries affecting the level of risk for multinational corporations investments are: political instability, control of remittances, expropriation by the host country government, and differences in government regulations. Internationally, many activities have been carried out to regulate the level of political risk, especially in developing countries. By adopting internationally acceptable investment rules, the influence of political risk on foreign direct investment inflows has been significantly reduced. Bearing this in mind, the aim of the paper is to point out the significance that the political risk of the host country has on foreign direct investment and the decisions of multinational corporations in carrying out cross-border activities.