The Effect of the Interaction of Political Stability and Size ofthe Economy on the Inflows of Foreign Direct Investment (FDI)

Foreign direct investment is one of the most important factors in economic growth anddevelopment in most countries in the world. This study investigates the impact of politicalstability - absence of violence on attracting foreign direct investments due to the size of theeconomy, using the Panel Vector Auto Regression model (Panel VAR) during the period1996 - 2018. Based on the results of the research, in developed and industrial economies,the variables of political stability - absence of violence and economic size, bothsimultaneously and individually affect foreign direct investment. In this group of countries,political stability - absence of violence have a lower impact on FDI and by increasing theeconomic size the impact of political stability - absence of violence on FDI is significantlylower. But in developing countries, political stability - absence of violence and economicsize do not have any significant effect on foreign direct investments separately, while themultiplier variable or on the other hands the interaction effect of the two variablessimultaneously, has a significant effect on attracting FDI. It means that also in this group ofcountries, the increase in the size of the economy reduces the impact of political stability -absence of violence on FDI. In general, the results show that in large economies, politicalstability - absence of violence has less influence on foreign direct investment, whereas in small economies, political stability – absence of violence has more influence on attracting foreign direct investment.