Abstract
Geopolitical risk (GPR) has increasingly surfaced as a primary determinant of foreign direct investment (FDI) dynamics across emerging market economies (EMEs). This empirical study investigates the impact of geopolitical risk on FDI net inflows across 18 major emerging market economies over the period 2003–2022. Utilizing Caldara and Iacoviello’s Geopolitical Risk Index alongside a two-step System Generalized Method of Moments (GMM) estimator, the econometric framework explicitly accounts for endogeneity, unobserved country-specific heterogeneity, and persistent lagged dependent variable dynamics. The empirical results reveal a statistically significant and economically substantial negative relationship between geopolitical risk and foreign direct investment inflows. Furthermore, control variables such as real GDP growth, trade openness, and institutional quality exhibit robust positive effects on inward FDI, whereas macroeconomic instability measured by high inflation deters foreign capital. Interaction effect analysis indicates that robust domestic institutional frameworks significantly attenuate the negative shocks associated with elevated geopolitical tension. The findings highlight the imperative for policymakers in emerging economies to strengthen administrative governance, enhance institutional resilience, and maintain macroeconomic stability to buffer against global geopolitical volatility.
