Abstract:
The increase of foreign direct investments flows reflected international and geocentric strategies struggling against environmental forces. The foreign direct investor faces greater overall uncertainty operating in an unfamiliar environment, and business opportunities abroad vary from those in home market due to different economic, political and cultural factors. While firms may control some transactional risks through internal governance mechanism, different legal environments causes varying and additional transaction-related risks and costs.
Country risk involves the possibility of losses due to country-specific economic, political and social events. Surrounding the term of the country risk it was always a debate among specialists, many of them using it interchangeably with other terms like political risk and sovereign risk. In our opinion, sustained also by other academic studies, country risk is a broader concept then either of the other two including them as specially cases. Political risk can be defined as the host country interference in business operation or political acts or constraints imposed on the firm such as confiscation (a government takeover without any compensation) expropriation(a government takeover with compensation), devaluation and revaluation, foreign exchange controls, currency inconvertibility, restriction on the repatriation of income, foreign wars and social instability. Sovereign risk refers the risk that a country will be unable to service its external debt due to an inability to generate sufficient foreign exchange.”
In this context, country risk analysis became a regular activity in many international businesses due to the fact that any firm wants to anticipate country risk events such as those mentioned above, risks which are beyond firm`s control. Thereby, country risk analysis focuses primarily on contextual, uncontrollable issues driven by legal processes, governmental institutions and business environment. From a theoretical perspective, existing work supports a conclusion that country risk suppresses foreign direct investment.
Our paper investigates the impact of country risk on foreign direct investment in Romania, the second largest recipient market of foreign direct investments in Central and Eastern Europe. Starting with a short literature review of foreign direct investment determinants and the role of country risk in international business, the paper continues with an empirical analysis of the impact of country risk and economic growth on foreign direct investment for a period of 11 years (2000-2011) with a special focus on institutions role in promoting public policies for attracting foreign direct investments.
