random effect model

Foreign Direct Investment (FDI) is one of the most important resources of developing countries’ economic modernization. According to international investors, political risk is one of the major deterrents to investment in emerging markets. Opinions about the significance of this influence are different depending on the considered period. The latest crisis could make adjustments in the investment policy. Nevertheless, some developing countries show a very significant amount of FDI attracted. This paper tries to answer the question: is there a dependence of the FDI inflow on the level of political risk in developing countries? And what kinds of political risk are most significant for foreign investors? Methods. On the basis of integral indicators of political risk in 149 countries from 2002 to 2010, authors have built the various econometric models in order to verify statistically the relation between political risk and FDI to developing economies. Results. According to the best of the created models, the most significant components of political risk for foreign investors are political stability, quality of government regulation, and government effectiveness.