Country risk, FDI flows and convergence trends in the context of the Investment Development Path

Jonas Hub Frenken & Dorcas Mbuvi

#2017-005

Based on the identification of two transition phases within the Investment Development Path (IDP), this study explores the relationship between country risk and foreign direct investment (FDI) over time and in relation to the process of economic convergence between emerging and developed economies. The findings suggest that both economic - and business environment risk factors are closely related to FDI flows. Furthermore, it is found that as countries progress through the various stages of the IDP, economic convergence comes together with similar trends of convergence in economic - and business environment risk exposure. These simultaneous long-term developments plausibly contribute to the convergence of countries in terms of in- and outward FDI flows during the later stages of the IDP.

JEL Classification: F21, F23, F43

Keywords: Country risk, foreign direct investment, convergence