Sociopolitical Events and Foreign Direct In vestment: American In vestments in South and Central American Countries,1950-1982

In any investment decision, risk is one of the most important consid-erations. A significant contributing factor to the risk offoreign invest-ment is sociopolitical instability of the host country. Despite otherfac-tors such as market size and competition, it is reasonable to assume a negative association between theflow offoreign direct investment and the emergence of sociopolitical instability symptoms. Surprisingly, however, a number of empirical cross-national studies have failed to show the expected association between the two.

This study discusses possible reasonsfor thefailure of past research and attempts to ascertain the relationship between foreign direct in-vestment (FDI) and sociopolitical instability. Using multiple regres-sion analysis with lagged independent variables, this study analyzes such a relationship for South and Central American countries for the years 1950-1982. Taken together as a group, no relationship wasfound between sociopolitical instability and FDI in South and Central Amer-ican countries. However, separate analyses for individual countries produced the expected negative association for some of the countries.

With the increasing volume and importance of FDI, there is a grow-ing interest among multinational corporations to incorporate foreign investment analysis into their strategic planning process. The results of this study indicate that because of the heterogeneity of sociopolitical structure of different host countries, a generalized set of criteria should not be used to measure the sociopolitical risk of investing in every country.