Does Political Instability in Developing Countries Affect Foreign Investment Flow?

An Empirical
Examination
Author(s): Mario Levis
Source: Management International Review, Vol. 19, No. 3 (1979), pp. 59-68
Published by: Springer
Stable URL: http://www.jstor.org/stable/40227471
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M. Lews*

in DevelopingCountries
Does PoliticalInstability
AffectForeignInvestment Flow?
An EmpiricalExamination

In 1959, just before the Cuban revolution,new investmentflows fromthe US to Latin

America accounted for some $ 338m. In 1960 this figuredropped to $ 95m. In 1962
net flows were negative.1Part of this change could be attributedto different accounting
procedures and differentinvestmentstrategies,but the investors'fear of an epidemic
political turmoilall over Latin America seemed to be a major factorin reducingthe US
investmentflow. In contrast,Indonesia just afterthree yearsof dramaticpoliticalevents
and a violent change of regime,became one of the major recipientsof foreigndirect
investment.These are only two examples, of many similarcases, were irregularpolitical
eventsproduced quite opposite effectson foreigninvestmentflows.
The purpose of this study is to examine empiricallythis ratherambiguous relationship
betweenthe state of politicalstabilityand the flow of directforeigninvestment.
Apart fromworksthat deal withthe determinantsof foreigndirectinvestmentin general,
one can identifytwo additionalgroupsof studies.One focusingon interviewswithforeign
investmentdecision makers,whereas the othergroup of studiesis based on cross-national
statisticaltests.
The formergroup has so far produced ratherequivocal evidence;while Basi and Aharoni
conclude that political risk is a major determinantin foreigninvestmentdecisions,Piper
seems to doubt it. Basi's2 study,based on a mail surveyof morethan 300 international
executives,found that a nation's level of political instabilityand the extentof its market
potential are the two most importantfactorsin foreigninvestmentdecisions. Aharoni3
tends to confirmBasi's findingsin regardto the importanceplaced by foreigninvestors
on the political stabilityof the host country.He notes, however,that the assessmentof
political risk is usually based not on hard evaluativedata, but ratheron impressionistic
generalizations.Root4 agrees with Aharoni on both points - the importanceof political
riskand the lack of a systematicevaluationof such risks.Similarresultshave been obtain-
ed by Hays5, Swansbrough6, and National ConferenceBoard7.
In contrastto the above, Piper concludes that, with veryfew exceptions, political and
social variables". . . tend in general,to be treated with the same lack of concern in the
foreigncontext as they are in the domestic"8. Investmentsurveystended to emphasize
technical,financialand economic variablesfallingwithinthe competence of a generally
technicalteam.
The second part of the literature,based on cross-nationaldata, tried to test empirically
the conclusions drawn from the above cited surveystudies. A study by Bennett and
Green9 found that there is no significantrelationshipbetween political instabilityand
the actual distributionof US marketinginvestmentabroad. They correlate political

* Mario Levis is at the School of Bath, GreatBritain.He wishesto thank

of Management,University
ProfessorC. R. Tomkinsfor his help and encouragement.

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instabilityevents with the 1965 US stock of direct investmentin each of the 46 nations
in the sample. However,stock of directinvestmentis too statica measureto captureany
dynamic linkagebetween the two variables.The Greenand Cunningham10findings,from
a study based on 25 nations, indicate that measures of marketpotential are the most
importantdeterminantsof the allocation of US foreigninvestment,while political in-
stabilitywas found not to be significantly related to foreigninvestment.The validityof
theirfindingsis not only questionable on the fact that they use the same staticmeasure
for foreigninvestmentas the previousone, but on two furthercounts as well. First,their
sample included both developed and developing countrieswhilstmost of the literature
impliesthat the formergroup is generallyperceivedas politicallystable by foreigninves-
tors; thereforethere seems to be an inherentbias in a study which includes developed
countriesthat may mask an otherwiseexistingrelationshipbetween political instability
and foreigninvestmentin developingcountries.Second, all the variablesused in the step-
wise regressionare based on 1965 data. One would expect that foreigninvestorsexpecta-
tions of futurestabilitywould be determinedby more than one year's political events,
and that there would be time lags in adjustinginvestmentdecisionsto new politicalcon-
ditions.
Also in this second group of studies,Kobrin11, usingthreeindicatorsof political instabil-
ity,obtained quite similarresults.However,he notes that this was expected because, as
Robock12 observed, while "discontinuities" in the political environmentmay occur,
these may not be sufficientto constitutepolitical risk.A coup, forexample, may increase
or lower risk,dependingupon who is removedfromand who comes into power. Never-
theless, as Kobrin himselfnotes, his dependent variable is the number of foreignsub-
sidiaries establishedin each countryover a certaintime period; first,this leaves out the
value of the investmentflow, and second, includes only positivedirect investmentdeci-
sions which mightbe misleadingfor the purposes of such a study- since companydeci-
sion makersmay eliminatepoliticallyunacceptable countriesfromfurtherconsideration
at a firstscreening.Thunell13,on the other hand,found "that the level of eitheror both
governmentevents and mass politicalevents are higherthe year of or before negative
trend changes in the numberof foreignsubsidiariesestablished.However,the reactionto
political events seems to be asymmetrical".While a high level of mass political violence
makes the companies decrease their investmentrelativelyfast, a low level of political
unrestis not enoughforthemto increasetheirinvestment.
This briefreviewof the literatureseems to point to a contradictionbetweenthe import-
ance given by executives to political environmentwhen makingan overseas investment
decision, and the actual directionof foreigninvestmentflows.There is a real need, there-
fore,for furtherexaminationof the relationshipbetween political instabilityand foreign
investment,tryingto eliminate,as much as possible,the potentialmethodologicalsources
of bias observed in the above mentionedstudies - i. e. the natureof foreigninvestment
data, the backgroundof countrieson which the analysis is based, and possible leads and
lags in the effectof politicaldisturbanceson foreigninvestment.

Hypotheses
Two broad hypotheseswill be tested in thisstudy:
1. Economic considerationsare the prime determinantsof foreigninvestmentflow. It
is thereforeexpected that a substantialproportionof the variancein investmentflow

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 will be explained by variablessuch as: economic situation,quality of life,balance of
paymentsconditions and governmentextractiveand distributivecapabilities of the
recipientcountries. Positiverelationshipsshould be expected between foreigninvest-
mentflow (FIF) and the firstthreevariables,and a negativewiththe last variable.
2. Political variables are second order determinants.In regard to the direction of the
relationshipsone would expect a positiverelationshipbetween FIF and an indicatorof
political stability,and a negativewith political instabilityand relationswith socialist
countries.However,this last relationshipis more complicated than those suggestedin
the firsthypothesis.
A furtherclarificatorynote is necessaryto indicate what type of study can be under-
taken in view of the limitationsof existingdata. Generally investorsweigh the return
on investment,both in absolute and in relativetermsagainst risk,one type of which is
political risk. An investment,therefore,in a politicallyunstable countrycould be made,
if the expected returnis sufficientenoughto compensateforthe additionaldegreeof risk
undertaken,or if the investmentdecision is determinedby the location of a needed raw
material. Unfortunately,profitabilityand industrydistributionof foreigninvestment
cannot be considered in this study due to lack of appropriatedata. Anotherimportant
issue is the relationshipbetween past and futurelevels of political instability.When the
foreigninvestormakes the decision to investin a country,he is likelyto be concerned
with its futurestate of political stability,and this is not necessarilyrelated to what has
happened in the past. Duffand McCamant14note that manifestationsof political instabil-
ity move discontinously.This means that the various manifestationswill erupt for a
period and then die down. A countrymay be apparantlyquiet when in fact it is ripe for
revolution.Nevertheless,a society cannot bear a state of violence for verylong before
it exhausts itselfand calms down - even though it may remainbasically unstable since
the dissatisfactionsand incapacitiesremain. Despite these two points, it is still believed
that exploringthe relationshipbetween past political instabilityand foreigninvestment
flow is meaningful,because in takinga broad coverageof countries,known patternsof
political instabilitydo influenceexpectations about the future. For example, while a
coup in one countrymay resultto an improvedclimateforwesterninvestment,a history
of political oscillation or disturbance will induce little confidence that the improved
climatecan be sustained.

Definitionof Concepts

Two measures of political stability are used in this study, each based on a different
approach to the problem. The first,and most common view, equates political stability
with the absence of domesticcivilconflictand violentbehavior.A stable policy is seen as
a peaceful law abiding society where decision makingand politico-socialchange are the
result of institutionalizedprocedures and not the outcome of anomic processes which
resolve issues throughconflict and aggression.The index developed by Feierabend and
Feierabend15was used to reflectthis notion of politicalstability.They identifypolitical
instabilitywith aggressivebehaviorand define it "as the degree of the amount of aggres-
sion directedby individualsor groups withinthe political systemagainstothergroupsor
16
againstthe complex of officeholdersand individualgroupsassociated withthem" .

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A secondapproachto politicalstabilitycan be foundin Lipset17and is basedon the
legitimacyof theregime, - i. e. theextentto whichthepoliticalsystemanditsoutputs
are acceptedas rightand properby thepopulation.Thisviewholdsthattheexistenceof
a legitimateconstitutionalregimehelpsto definetheveryconceptof stability andis not
to be regardedas a consequenceor resultof a stablesystem.Such an approachviews
stabilitynot just as theabsenceof negativephenomena, but as thepresenceof positive
supportand acceptance.A studyof strifefortheyears1961-63 identified a number of
nationsthathad less strifethanmightbe expectedon thebasisof characteristics they
sharedwithmorestrife-ridden polities.One apparentcommondenominator amongthem
wasa legitimate regimeattaining a highdegreeof popularsupport18 .
The conceptof legitimacy is ratherbroadand elusiveand does not lenditselfeasilyto
quantification.Afterconsidering a numberof possibleindicators thatmightapproximate
its definition,
suchas the numberof activepoliticalparties,originsof nationalpolitical
laborunionmembership
institutions, etc.,an indexconstructed by Banks19waschosenas
a proxyvariableforlegitimacy becauseit was believedto be themostcomprehensive and
reprensentativeof the concept.The indextakesintoconsideration theeffectivenessof
thelegislatureprocess,thenatureof theofficenominating process,theexistenceof par-
liamentarypluralism, thegovernment's structureandtheparties'legitimacy.
The degreeof aggressive behaviorand the legitimacy of regimecan be viewed,in this
study,as eithercomplementary or substituteindicatorsof the stateof politicalstability
in eachcountry.

Methodology

Data werecollectedfor25 developingcountries20fromthreecontinents - Africa,Asia

and LatinAmerica.Separateanalyseswereconductedforthreesubsequent timeperiods.
PeriodI: 1962-64, periodII: 1965-67, periodIII: 1968-70. All thevariablesused in
index,whichrecordspoliticaleventsofthe
thestudy,exceptforthepoliticalinstability
annualaverages
1956-61 period,represent foreachperiod.

The Dependent Variable

As thedependentvariabletheannualaverageforeign flowof investmentforeachofthe

nationsin thesampleis taken.Thesedata werecollectedfromthe BalanceofPayments
Yearbookof the International MonetaryFund. IMF reportsannualchangesin foreign
directinvestment fora largenumberof countries. The data used forestimatingchanges
in directinvestment are mainlyobtainedfromcompanies'annualreports,incometax
returns,reportsto governments in connectionwithexchangecontrolregulations, andin
severalcountriesquestionnairessentto thecompanies. A numberofproblems haveto be
notedwithregardto thesedata. First,whilemostof thedata are shownin US dollars,
someothersareinlocalcurrencies.Whenitwas necessary to changecurrencytheexchange
ratesgivenby IMF wereused.Second,becauseofthedifferent sourcesandmethodsused
for estimatingchangesin directinvestment, the data are not fullycomparablefrom
countryto country.For example,the reinvestment by foreignownedsubsidiarycom-
paniesof theirundistributed earningsis includedas investment flowby somecountries

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and not by others.However,suchdifferences are generally consistentovertime.Third,
nationalizations of foreignassets are generallyreportedas negativeinflowof foreign
investment. Suchflowsdo not,however, reflecttheforeign investors'
voluntarydecisions,
and therefore cannotbe consideredas investment flowforthe purposesof thisstudy.
Extremecarehasbeentakento deductflowscausedby nationalizations.
Despitea possibleslightloss of precisionin measuring the investment flow(becauseof
theabovementioned problems) thesedata are still in
considered, comparisonwiththe
alternativesavailable- i. e. stockofdirectinvestment and number of foreign
subsidiaries
actuallyestablished, to be the most appropriate forthe analysisat hand.Theyare dy-
namic,in the sensethattheyrepresent theannualchangeof directinvestment, whether
it is positiveor negative,
and theyareavailablefora longtimeperiod,a factthatenables
theresearcher to analyzedifferenttimesensitive relationships.

The IndependentVariable

Seven independent variableswere used in the study.They are presentedin Table 1,

together withthe indicators whichwereto providea measureforeach.The choiceof the
variablesis basedon previoustheoretical and empirical research.
However, threeof them
- government capabilities,relationswithComeconcountriesand thepoliticalcompeti-
tionindex- haveneverbeentestedempirically untilnow.The independent variables can
be broadlyclassifiedintotwogroups,economicandpolitical.
Thedatafortheindependent variableswerecollectedfroma numberofdifferent sources,
mainlyUN publications.
The firstmeasureof politicalinstability, developedby Feierabendand Feierabendis
baseduponthenumberand intensity of politicalactivities
ofa nation.Theyhaveisolated
thirtytypesof politicaleventsto whichtheyhaveassigneddifferent weights.The more
destabilizingthe activity, the weigherthe weightit receives.Accordingly a three-digit
scorewas calculatedforeachnation,whichrangesfrom0:00 to 6:99.
politicalinstability
The firstdigitrepresents the weightattachedto the mostdestabilizing eventoccuring
withinthenationoverthetimeperiodbeingconsidered.It is thisdigitwhichassignsthe
countryto its positionwithintheseven-point scale.The remaining two digitsrepresent
the sum of theweights(up to 99) assignedto each of thedestabilizing eventsoccuring
withinthe polityoverthe timeperiod.Thus,thesedigitsdetermine a nation'srelative
positionwithineach of the scalarpositions.The reasonthatthemostdestabilizing event
determines the scalar positionappearsto be thatit providesthe best indicationof a
nation'soveralllevelof politicalinstability.The implicitassumption, thereforeis thata
nationis onlyas stableas itsmostdestabilizing event.Thisstudy,however, investigates
therelationship betweeninvestment flowand thetotalamountof politicaldisturbances,
becauseas was notedabove,a singlemajordestabilizing eventmighthaveeithera negative
or positiveeffecton theforeigninvestor. Thus,onlythe lasttwo digitsof thelasttwo
digitsof theFeierabend and Feierabend index.
The politicalcompetition indexrangesfrom1 to 12. The higherthe competition index
the betterestablishedthe legitimacy of a systemand the higherthe levelof political
stability.
The variablesconsisting of morethantwoindicators - qualityof lifeindexand economic
-
conditions are constructed by weightsassignedto thembyfactoranalysis.The indica-

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 Table 1.- Independent Variablesand theirIndicators

1. Qualityof Life Index

- GNP per capita
- Numberof privatecars per 1 000 population
- Numberof doctorsper 1 000 population
- Numberof hospitalbeds per 1 000 population
- Infantmortalityrate
- Calorie consumptionper capita

2. GovernmentCapabilities
- Total taxes collectedas percentageof GNP
- Budgetaryexpenditureson social servicesas percentageof GNP

3. Balance of PaymentsConditions
- Importcoverageratioby foreignexchangereserves
- Exchangeratestability
4. Economic Conditions
- Energyconsumptionper capita
- Cross fixedcapital formationas percentageof GNP
- GNP per capita growth
- Annual inflationrate
- Value of exportsas percentageof GNP
5. RelationswithComecon Countries
- Total tradewithComecon as percentageof total internationaltrade
- Capital flowand bilateralcommitmentsper capita fromComecon
6. PoliticalInstability
- Feierabendand Feierabendpoliticalinstabilityindex

7. PoliticalCompetitionIndex
- Effectivenessof the legislature
- Nominatingprocess
- Legislaturecoalitions
- Partylegitimacy

tors of governmentcapabilities,balance of paymentsand Comecon relationsare given

equal weightsand theirstandardizedscores added.
The hypothesesare tested by regressingFIF, using differenttime leads and lags, on the
independentvariables,and evaluatingthe overall explained variance of FIF and the signs
of the regressioncoefficients.

Findings

Table 2 shows the stepwise regressionresultswhen all the variablesare for the period I
(1962-64).
Table 3 shows the equivalent resultsfor period I independentvariables and period II
(1965-67) investmentflow.
Examinationof the regressionresultsraisesa numberof points.
(1) While all independentvariablesenterin both regressionequations, providinga signifi-
cant overall coefficientof determination21 , the variance of FIF explained by the in-

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 Table 2: Stepwise RegressionResultsfor FIF I

Step Variable r R2 F-ratio Betas

1. GovernmentCapabilities -.41 .16 4.38 -.68*

2. Economic Conditions -.36 .21 2.83 -.39
3. PoliticalInstability -.09 .28 2.58 -.38*
4. Qualityof Life Index .09 .33 2.35 .38
5. Comecon Relations .00 .40 2.40 .57*
6. PoliticalCompetition .18 .44 2.30 .38
7. Balance of Payments -.14 .51 2.52 .36

up to a .05 level
♦Significant

Table 3: Stepwise RegressionResultsfor FIF II

Step Variable r R2 F-ratio Betas

1. Qualityof Life Index .40 .16 4.32 .68*

2. Economic Conditions -.21 .31 4.70 -.50*
3. Balance of Payments .07 .47 5.98 .68*
4. GovernmentCapabilities -.29 .51 4.88 -.49*
5. PoliticalCompetition .30 .55 4.40 .44*
6. Comecon Relations .19 .61 4.50 .38
7. PoliticalInstability .08 .62 3.70 -.07

•Significantup to a .05 level

dependentvariablesis greaterunderthe assumptionof one-periodlag than that explained

under a no-lagassumption22. The signsof the betas, however,in the two regressionequa-
tions are identical. Both findingsprovidepositiveindicationof the independentvariables'
predictiveability.
(2) The economic variables override in importancethe political ones. Quality of life,
balance of payments,governmentcapabilities and economic conditions are the prime
determinantsof foreign investmentflow, in agreementwith the firsthypothesisand
previous research findings.The former three variables are correlated in the expected
directionwith investmentflow. (The negativesign of governmentcapability means that
strong distributiveand particularlyextractivecapability is likely to implyan unfavor-
able tax systemfor the foreigninvestoras well.) The negativecorrelationwitheconomic
conditionsis however,ratherpuzzling. One possible explanation mightbe givenin terms
of the bargainingposition of the host country. Less economically developed countries
seekingforeigncapital are likely to offermore fiscal incentivesto attractsuch capital,
which in combinationwitha probable unexploitedmarketpotentialmake the investment
worthundertaking.
(3) The regressionfindingsfor the political variablesstronglysupport our second hypo-
thesis.The variance explained by the threevariables,namelypolitical instability,political
competitionindex and relationswithComecon countries,is in both regressionssubstanti-
ally lower than that of the economic variables.However,one mustnote that thisvariance
is, in absolute and relativeterms,higherin the no-lagregressionthan in the one-period

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lag. This mightbe an indicationthatnot all the variableshave the same time effecton the
investmentdecision and pointsto a possible area of futureresearch.
(4) Turning to the individual political variables, we observe that while the political
instabilityvariable in the first regressioncontributesa substantialamount to the ex-
plained variance,and its beta is statisticallysignificantand in the hypothesizeddirection
(negative), it turns out to be non-significant in the one-period lag regression.In this
context it is importantto bear in mind that the instabilityevents included in the Feier-
abend and Feierabend index are for the period 1956-61, a period which seems to be
relevantfor investmentdecisions made duringthe period 1962-64, but outdated with
regardto the 1965-67 investmentflows. Political events closer to the later investment
date are likely to have been taken into consideration.The importanceof the political
environmentin the foreigninvestmentdecision is supportedeven furtherby the signifi-
cant beta coefficientof the political competitionindex, obtained in the one-periodlag
regression.The relations with Comecon countriesvariable is also significantin the first
regressionbut not in the second23; although in both cases the beta's signis in contradic-
tion to the second hypothesis.It seems that close relationswithsuch countriesdo not act
as a deterrentto westerncapital flow. Nevertheless,fromevidencefromexpropriationof
foreign assets in these countries,it appears that strongrelations with Comecon may,
under certain circumstances,constitute an element of political risk24. A developing
country in close and rewardingcooperation with socialist countries,may considersuch
relation as adequate for its developmentalplan needs and decide to "free" itselffrom
"dependence" on westerncapital.
Before concluding,it is importantto consider one more point. Regressionanalysis tell
us how a set of independentvariablesX and a dependentvariable Y co-vary,but it does
not enable us to postulate causal relationshipsbetweenX and Y. Under certainqualifica-
tions, it is^reasonable to inferthat if conditionX regularlyprecedes Y, it is probably a
"cause" of Y. The general argumentof the "Cross-laggedpanel technique" is that if X
is a cause of Y, then the followingpatternof correlationcoefficientshould hold25:
1. Xj correlatesmost stronglywithY2
2. X! correlatesmoderatelywithYj
3. X2 correlatesmoderatelywithY2
4. X2 correlatesweaklywithYi
The rationale is simplythat if X causes Y, then presentX should have some distinctive
effecton futureY, but presentY will have littleeffecton futureX. The correlationshelp-
ful for determiningthe direction of causality are those labelled (1) and (4) above. Im-
mediacy of effectsis reflectedin (2) and (3). The four analogous for this study,coeffi-
cients of determinationbetween the set of independentvariablesand foreigninvestment
flow, are: (1). R2 = .62 (2). R2 = .51 (3). R2 = .2226 (4). R2 = insignificant.
These four
coefficientspoint to the possibilityof a "causal" relationship.However,furtherstatistical
analysisis needed in orderto establisha positiveconclusion.

Conclusions

In contrastto most of the previousworks,based on cross-nationaldata, our findingsare

consistent with the conclusions reached by interviewresearch studies - that political
stabilityis an important,but not the primedeterminantof foreigninvestmentdecisions.

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However, our evidence suggeststhat the differingresultsobtained in the previouscross-
national studies are ratherdue to their methodologicaldeficienciesthan to any other
substantialreason. More specifically,two assumptionsimplicitin these works appear to
be unjustified.In the firstplace, it is assumed that the same laws apply fordeveloped as
for developing countries (Green and Cunningham).The negativerelationshipbetween
political instabilityand investmentflow establishedin this study is valid for developing
countries only. The investor's subjective perception of the political risks involved in
developed countriesmake it extremelydoubtful if a similarrelationshipcan be held for
this group of countries.The inclusion thereforeof developed countries,in such an ana-
lyse is unwarranted,and most probablymisleading.In the second place, the earlierstudies
assume that the time span chosen for analysis is immaterial(Bennett and Green, Green
and Cunningham).The results of this work, however,indicate that a certainlag would
occur before the effectof political disturbanceon investmentflow is fullyfelt;but after
that, one-period lag, the impact of such eventsdiminishesdrastically.This is consistent
with the widely held view that multinationalinvestorsare capable of quick adjustmentto
new developed conditions.The divergentresultsof the earliercross-nationalstudiesmay
also be due to the lack of serious considerationof the dynamic relationshipbetween
political instabilityand investmentflow resultingfrom the use of static or inadequate
(Kobrin) data formeasurementof the directinvestmentflow.
Although the state of political stabilityappears to be an importantfactor in the inter-
national investmentdecision, this study does not imply that foreigninvestorsuse, or
should use, political event data as direct indicatorsof political risk. Such data are mean-
ingfulonly when consideredin conjunctionwith a numberof otherrelevantfactorsand
in the context of the particularcountryunder evaluation. Empirical identificationand
analysisof the sourcesof politicalriskstillremaina challengingarea forfutureresearch.

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14 E. A. Duff and J. F. McCamant,"MeasuringSocial and PoliticalrequirementsforSystemStability
in Latin America",AmericanPoliticalScience Review,December,1968.
15 I. K. Feierabend and R, L. Feierabend,"AggressiveBehaviorin Polities:A Cross-nationalStudy",
Journalof ConflictResolution,Fall, 1966.
16 ibid. p. 250.
17 S. M Lipset,PoliticalMan, (New York 1959).
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(Princeton: Center of InternationalStudies, PrincetonUniversity,Research MonographNo. 28,
April,1967).
19 A. S. Banks,Cross-PolityTime Series Data, (MIT Press,1971).
20 The countries included in the sample are: Argentina,Bolivia, Brazil, Burma, Chile, Colombia,
Ecuador, Egypt,Ghana, Guatemala,Haiti, India, Indonesia,Iraq, Liberia,Libya, Mexico, Morocco,
Panama, Peru,Philippines,Sri-Lanka,Syria,Sudan, Venezuela.
21 The firstregressionoverallR2 is significant
at a .06 level only.
22 A two-periodlag was tested as well; the stepwiseregressionmade four iterationsbefore the mar-
ginal increase in the coefficientof determinationwas not largeenough to be statisticallysignifi-
cant The resultingequation was: FIF III = .50 Qualityof life-.45 Govern,capabilities+ .42 Com-
petitionindex + .41 Balance of paymentsR2 = .39 (F = 3.03).
23 Significantonly at . 10 level.
24 "A MultifacettedApproach to Political Risk in OverseasInvestment"Forthcomingpaper by the
same author.
25 T. Gurr, Politimetrics:An Introductionto QuantitativeMacropolitics(Englewood Cliffs,New
Jersey:Prentice- Hall, 1972).
26 The resultingequation included only two variables:Qualityof lifeindex and government capabili-
ties.The overallcoefficientof determination was significantat .06 level.

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