The Effect of Political Risk on Foreign Direct Investment in Iran

The aim of this study at first is to study the effective factors of FDI and then the estimation of these effects during 1983-2014. In this regard the causality relationship between FDI and political risk, GDP, trade openness index, inflation and exchange rate, has been investigated through Hsiao and Toda-Yamamoto tests. Then using a smooth transition regression model, the effect of determinants of foreign direct investment will estimated. In addition, results show that political risk, GDP and exchange rate are statistical cause of FDI, but trade openness index and inflation have no significant effect on foreign direct investment.In addition, the nonlinearity of model was also verified. The model showed that the FDI function can be investigated in the form of a structure with a two regime with threshold value of $ 2,000 million. Political risk in both regimes has a negative effect on foreign direct investment, but with the arrival to high regime, the sensitivity will be reduced. This relationship between the GDP and FDI is opposite.