Country Risk and FDI Inflow in Mauritius: An asymmetric impact

Abstract The concept of investment has emerged as a fundamental tool globally. FDI has been a crucial weapon in the economic development of countries, mainly developing ones. This study assesses the existence of asymmetry in the risk-FDI nexus in the case of Mauritius. The constructed county risk index from the Principal Component Analysis (PCA) includes a combination of political, financial and economic sub-components of risk. The impact of country risk on FDI Inflows is then explored using a dynamic time series approach using annual data from a time interval of 1980–2019. The existence of potential asymmetric effects of risk on FDI is tested using a non-linear ARDL (NARDL) model. Both the long run and the short run have been studied, where the findings reveal that the negative changes are significant as compared to the positive changes of risk towards FDI Inflows. The regression results also conclude the presence of asymmetry in the risk-FDI linkage. Furthermore, the graph generated from the cumulative dynamic multiplier confirms that the magnitude of the negative shock of risk is stronger. Finally, the stability and the diagnostic testing corroborate the use of the NARDL in testing the risk-FDI linkage.