Do Geopolitical Risks and Institutional Quality Deter Foreign Direct Investment? Evidence from a Panel of 41 Countries

This study applies panel data analysis to investigate how the foreign direct investment (FDI) inflows in 41 countries from 1995 to 2024 vary with geopolitical risk (GPR) and institutional quality. Using a Hausman specification test, a fixed‐effects model with clustered robust standard errors is used to address unobserved country heterogeneity and enhance the reliability of estimates. The results show that GPR and inflation negatively affect FDI inflows. The quality of institutions, as represented by the Rule of Law (ROL), is negatively associated with FDI, suggesting that FDI investors in some emerging economies might prioritise cost competitiveness over stronger institutions. Market openness (MO) and population size have a positive impact on FDI inflows, while GDP has a negative impact. The results underscore the need to uphold macroeconomic stability, competitiveness and policies conducive to foreign investment amid increased geopolitical uncertainty. This study not only reviews the literature on the determinants of FDI but also offers policy implications for building investment resilience amid geopolitical uncertainty by providing comprehensive evidence from a panel of diverse developed and emerging economies.