German FDI within the European Union: the role of political risk and migrants

This paper investigates whether political risk negatively influences the FDI location decision of German MNEs in member states of the European Union (EU), and whether the German migrant stock in the host country help to mitigate the perceived influence of political risk. This study takes the same approach as Karreman, Burger and van Oort (2017), using 2710 German greenfield investments to 22 EU countries between 2003-2010. Strikingly, the result indicates that political risk positively influence the probability to receive German FDI. I find that market-seeking FDI is the main cause of this positive relationship, the location choice of efficiency seeking FDI is actually negative influenced by political risk. Moreover, this study shows the importance to analyse the various components of political risk separately and in more detail. Among the various components of political risk it is found that ethnic tensions, internal and external conflict are positively related to the location choice of German MNEs, but the components military in politics, religious tensions, democratic accountability, corruption, bureaucracy quality have a negative affect the location choice of German MNEs. At last, I find evidence that the relationship between political risk and FDI depends on the size of the German migrant stock. However, this effect is the opposite than expected, in countries with a large migrants stock the effect of political risk on the FDI location choice is negatively influenced.