Geopolitical risk and foreign direct investment: the role of liberalization, institutions and financial markets

Abstract

Purpose The study aims to investigate the impact of geopolitical risk (GPR), liberalization, institutions and financial markets on foreign direct investment (FDI). Design/methodology/approach This study incorporates a quantitative approach through fixed effect estimation, combined with the dynamic panel analysis using generalized method of moments estimation, and uses country-level data across Muslim economies from 1990–2020. Findings Good governance, a conducive environment and well-developed financial systems in destination markets yield heterogeneous outcomes when interacting with geopolitical tensions. This dynamic is particularly evident in both high and low economies, which tend to experience positive effects. In contrast, middle economies are disproportionately impacted, facing adverse consequences from reduced FDI inflows compared to other regions. Research limitations/implications This research underscores the importance of ensuring stability, transparency and efficiency in Muslim economies to create a more resilient and attractive environment for FDI under geopolitical influence. Practical implications Prioritizing the establishment of robust institutions, a resilient financial system and economic liberalization is essential for host economies, as it reduces over-dependence on specific economies that may be more vulnerable to geopolitical disruptions. Originality/value Given the limited studies that explore the interplay of GPR, institutions, liberalization and financial market development in attracting FDI, particularly in Muslim economies, this research offers valuable insights for policymakers and scholars aiming to enhance foreign investment strategies and strengthen economic resilience.

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