ABSTRACT
This chapter employs a broader political economy analysis that concentrates on the role of political considerations in influencing economic policies. It uses the measure of trade policy orientation. Support is found for the view that political variables have an important influence on international capital flows and that both traditional measures of political instability and measures of relative political capacity have independent explanatory powers. The predicted effects of the macroeconomic and political variables on the expected return on investment and degree of risk. A number of studies have considered the effects of political and economic variables on direct foreign investment. The chapter finds that consistently positive and statistically significant coefficients on the trade policy variable could therefore be taken as evidence that export platform investment dominates the flow of direct investment to the countries in the sample. The regression results for direct foreign investment measured in nominal terms on macroeconomic variables only.
