Authors: Dimitrios Asteriou, Antonios Sarantidis

Title: The Effect of Political Instability on FDI and Growth: New Panel Data Evidence from 43 Countries

Abstract

The aim of this paper is to redefine political instability and to quantify its impact on economic growth, the volatility of economic growth and foreign direct investments. Five political instability indicators are constructed by employing exploratory factor analysis and principal component analysis in order to quantify and to measure political uncertainty from a large set of indicators that unavoidably have some degree of multicollinearity. These new indicators are constructed from a sum of 27 different variables that are mainly used and mentioned in the corresponding empirical literature of political instability. The sample is based on a panel data set with annual observations on 43 countries from 1970 to 2014. The empirical part utilizes the methodology of system Generalised Method of Moments (GMM) panel data regressions, producing interesting results. The research contributes to the literature by providing new measures of political instability. Moreover, it provides to policy makers a deeper understanding of the effects that political instability has on economic growth and foreign direct investments.