The Impact of Coup/Junta on Foreign Direct Investment

The significance of foreign direct investment (FDI) in a country’s economic growth cannot be overstated. Growth, new industries, and the spread of cutting-edge innovations are all stoked by its presence. But political instability, such coups or the installation of a military dictatorship, may have a major effect on the amount of foreign direct investment (FDI) a country receives. This paper intends to investigate the numerous channels through which military takeovers have an impact on FDI and the economies of the countries that host these investments.

1. Investor Trust:

The loss of investor trust is a major factor in how a coup or junta affects foreign direct investment. Investors are wary to put money into businesses in an unstable political climate. Loss of faith in the economic stability of the host nation may result from the unexpected change in administration and possible policy revisions. As a result, FDI inflows might fall as investors shift their capital to safer countries.

2. Unpredictability in Policy:

Changes to investment restrictions, tax policies, and property rights are common after a coup or junta takes power. Foreign investors, who prefer to work in a predictable setting, are thrown into a state of anxiety by these abrupt changes. Since foreign investors like governments with consistent and transparent policies, uncertainty about the incoming government’s economic plan may discourage FDI inflows.

3. Uncertainty in the Economy:

Furthermore, FDI is discouraged when political uncertainty leads to economic instability. In many cases, public services, infrastructure construction, and economic planning suffer when a coup or junta takes power. The inflation rate, exchange rate, and GDP growth of the host nation may all suffer as a result of this unpredictability. As a result, the country may get a bad reputation among investors, resulting in less influxes of foreign direct investment.

4. Difficulties with the Law and Regulations:

Changes to the legal and regulatory systems may be implemented when a coup or junta takes power. Foreign investors may find it difficult to comply with legislation in their own countries. Lack of a well-functioning and open legal system can drive up transaction costs and discourage foreign direct investment. This might reduce the amount of foreign direct investment (FDI) flowing into the host nation, since potential investors might prefer countries with more developed legal systems.

5. The Loss of Credibility:

A country’s image may suffer if it has a coup or junta because of the unfavourable attention it receives from the rest of the world. Foreign investors who value human rights and ethical business practises may be discouraged by reports of political unrest and human rights abuses. A drop in foreign direct investment (FDI) and prospective boycotts by international corporations and consumers might damage the host country’s reputation.

There can be no doubt about the effect a coup or junta has on FDI. The fall in foreign direct investment (FDI) flows can be attributed to a number of factors, including a loss of investor confidence, policy uncertainty, economic instability, legal and regulatory hurdles, and reputational harm. Countries that value political stability, transparent governance, and consistent policies are more likely to attract and keep international investment. By doing so, they may lessen the impact of coups and juntas and create a more welcoming atmosphere for FDI, all of which are crucial for a country’s economic growth and development.

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The Impact of Coup/Junta on Foreign Direct Investment