Abstract
A country’s economic stability relies on its corresponding political stability, allowing foreign and domestic investors to devote themselves to its business space. Political instability is a primary factor discouraging FDI since such investors may not find it a favorite to determine the correct location of investment alongside the amounts to put into the business. The research, which uses a case study of countries in North Africa and the Middle East, breaks down the period when the countries involved experienced political instability hindering the conventional economic processes, including foreign investment. Further, the critical institutions in the country responsible for offering services to the citizens were anticipated to face similar compromises leading to the current unrest in the country. The research relies on the hypothesis that FDI is directly affected by political stability in a country. Quantitative data analysis would be used in analyzing data from different data sets to determine the implication of political instability in the said countries and how it affected FDI. It is against this backdrop that the research proposal tries to provide a blueprint of research for determining the relationship between FDI and the political instability of any country or region around the world.
Introduction
The performance of institutions in a country greatly depends on the political stability experienced in that country (Hoque, Akhter & Yakob, 2018). The efficiency, reliability, and consistency in the performance of such institutions are attributed to a situation where the country is stable politically, and the country is experiencing no heightened situation politically that may escalate to economic and social affairs. Similarly, Foreign Direct Investment (FDI) relies on a country’s political wellness to identify the right investment, its location, and the amount suitable for each proposed investment. The returns an investor gets as revenue from the investments are influenced by the prevailing political temperatures in the country (Sabir, Rafique & Abbas, 2019). Therefore, major institutions in a country, alongside foreign direct investment, are influenced by the prevailing political situations. It implies that their underlying performance would vary according to the existing variations in the political environment.
Major institutions in a country include the economic and political institutions whose conventional operations greatly depend on the country’s political situation (Alam, Uddin & Yazdifar, 2019). The institutions would be more reliable and exhibit independence in discharging their various roles in a country without political influence. The judicial system, the investigation department, and the ethics-related institution overseeing public servants’ conduct are politically sensitive. The prevailing political instability also likely influences the national auditor of financial allocations to various government departments. Moreover, the security apparatus, including the police, may be affected by the instability in politics, which includes their inability to exhibit impartiality in discharging their definite duties (Alam, Uddin & Yazdifar, 2019). To this end, it is clear that institutions in a country would operate depending on the dictates of politics and related stability. With political instability, significant institutions may not exhibit independence and competency in discharging their required responsibilities.
The far-reaching implication of a lack of independence in institutions in a country affected by political intolerance is the inability of FDI to come into the country since there are no working systems that would be trusted with their investments (Baiashvili & Gattini, 2020). A country with inconsistently operating institutions may not attract foreign investors since conventional operations may be altered and affected, reducing business activities. With a reduced business activity in a country accessioned by a political situation, foreign investment risks a continuous loss with no likely increase in the returns on investment. Such an incidence would reduce revenues and the number of few foreign investors coming into a country, leading to a reduction in the country’s overall economic performance.
It is worth noting that foreign direct investment allows countries to create mutual business avenues which are larger and more diverse in terms of products and services (Baiashvili & Gattini, 2020). Exchange in technological aspects is also fostered through FDI, and it makes it easier for businesses to compete effectively in a larger market brought about by foreign ties coming with foreign investment. Moreover, business resourceful information and consultations are available from experts seeking to invest in a foreign country, making it easier for businesses to thrive and become more competitive (Bruno, Campos & Estrin, 2018). Therefore, the presence of political instability in a country subjects the country to limited business space and the larger market that would come with foreign partnering hence reduced economic prosperity. It is, therefore, worth insinuating that political instability may hinder economic growth and performance in a country leading to poverty (Bruno, Campos & Estrin, 2018).
Research questions
- What is the impact of political unrest and violence on institutions and on foreign direct investments?
- What impact does political unrest have on the market?
- What is the far-reaching implication of the effects of political instability in the economy of a country?
Importance of the study
The research focuses on identifying possible challenges brought about by political instability in a country and how that may affect how the country relates with foreign entities seeking to invest in the country. The research dissipates the need to have institutions in a country that function conventionally to allow foreign investors to invest successfully in the country. FDI typically considers many issues to be able to achieve the investment goals. For a direct foreign investment to succeed, there is a need for constant political stability for investors to have optimum opportunity to identify favorite locations in the country and decide which amounts to put into the investment. It is worth noting that businesses would be affected by an existing political situation of unrest, and returns on investment would reduce. The implication of war is the reduction in foreign investors trying to partner and invest in such a country. This study is essential as when businesses invest in the local economy, it helps economic development in countries and can promote a better quality of life, which ultimately will help maintain a non-violent stance.
The research, therefore, provides valuable information to countries in the brinks of political unrest to understand the need to minimize or eliminate the unrest to pave the way for the improvement of institutions as well as making a better environment for FDI. The research further provides insights into the economic implications of peaceful coexistence in a country since it would easily attract partners and investors from outside the country who find a steady and stable market. It also gives such potential investors ample latitude to choose from among myriads of investment opportunities to settle on to increase business. Therefore, economic growth is attributed to political stability in a country. That institution responsible for conducting significant activities in a country gets the independence and competence to deliver a peaceful economic setup. The research, therefore, leaves a take-home challenge to leaders in developing and developed countries that still face instances of political instability and inconsistencies in the operations of institutions in such countries to work towards achieving peace for robust economic development.
Policy implication of the research
Policy making is crucial in determining a country’s direction in terms of economic growth. The operations of major institutions in a country get direct influence by the policies put in place by the government or an administrative body in such a country. The competence and independence of institutions like the judiciary can be influenced by the formulated policies in the country by the various law-making bodies and regulators. It is important to remember that for such policies to work effectively, there must be corresponding political stability in the country to achieve such a milestone. In some cases, the policies made in a country may influence the political situation. Examples of political instabilities experienced in most of the countries in Northern Africa and the Middle East come from policies governing the usage of natural resources. Therefore, policymakers can, to a greater extent, restore peace in a country by making well-researched policies customized to the prevailing political situation in their country.
The policies made in a country may also influence foreign relations that the country would have with other countries, unions, and trade blocks. Such cordial relationships between countries can boost the chances of securing FDI, creating good economic implications and leading to development. Without favorable policies in a country, the instances of such a country securing foreign investment may be minimal, leading to sabotage in development processes. The policymakers in a country are in the frontal position in ensuring that economic strategies are designed so that the country can continually develop, increasing the market size for all products and services from the domestic and foreign markets.
Hypothesis
The research hypothesizes that the country’s political situation directly affects the operations of its institutions and the likelihood of foreign investors investing in the country in question. Therefore, the political temperatures of the country influence the accessibility of a country to investors; the research poises that the FDI in a country with a political situation may not be a successful one since deciding on the business location as well as possible amounts of investments may be affected considerably. A country experiencing political stability would appear more attractive to foreign investors since it is easier for them to do business in the country since there is a guarantee in the market performance resulting in the elevation of returns on investment. The hypothesis, therefore, implicates that for a country to attract investors and have sound functioning institutions guaranteeing reliability, there must be political stability. It further suggests that for a country to be attractive to foreign investors, it must have a better relationship with the foreign countries as dictated by the policies and regulations designed by the policymakers.
Literature review
Background
War and general political instability, as witnessed in most North African countries and the Middle East, are attributed to several issues that present complexity in resolving to lead to war. In the North African context, war’s causes appear to differ from those witnessed in the Middle East (Kahloun et al., 2019). The similarity is seen in countries affected by the famous Arab Spring that swept across the Middle East and North African countries, with a good population affiliated with the Muslim creed. The countries in the regions mentioned have experienced stalled relationships with foreign investors who fear the tensions rising in such countries and the implications that such heightened political situations have on doing business with them (Eaton et al., 2019). Moreover, institutions found in these countries are subjected to inconsistencies in their operations since independence is not witnessed at the various levels of operations. It, therefore, presents the unbearable inability to cope with the requirements of investors, leading to limited economic developments occasioned by the presented political situation.
Poor leadership and democracy
According to Boum & Stein (2018), the lousy leadership experienced in the region dramatically contributes to the war experienced in the region over the years. Political leaders have for a longer time sabotaged democracy, and the transition of power has brought incidences of war and ongoing political instability. In Libya Egypt, and Sudan, for example, perennial leaders considered interfering with conventional processes of democracy that limited a leader’s term limits making it a cause of war each time an election is held (Kahloun et al., 2019). Some regional leaders would stage new policies to allow them to stay in power for more extended periods without having to undergo the conventional election processes. To a greater extent, this undermines the operations of institutions in the country like the electoral body, the justice system, and law enforcement. Such a compromised state of the institution in a country would intrigue members of the population to raise questions about the legitimacy of the government, with others pushing for immediate reforms. Through such push and pull, war is sparked, leading to hostility among citizens, eliminating the possibility of effectively doing business in the country by domestic or foreign entities through FDI.
Foreign entities find it difficult to associate with countries where democracy is still under unending tests, especially in the 21st century. The European Union, the UK, and the USA may also sabotage such countries through economic sanctions to compel the leaders in power to consider allowing justice to prevail and the citizens to enjoy democracy (Schumacher & Schraeder, 2019). Therefore, due to such international restrictions, it becomes very uneasy for investors and business entities to partner with such countries for business purposes. The humanitarian considerations, as well as the unreliable status of the political situation, may make it difficult for foreign investors to have the required peace in conducting their business operations.
It is worth noting that foreign investors also feel criticized and even sanctioned for associating with countries whose leadership does not give room for democracy and democratic processes (Bruno, Campos & Estrin, 2018). The international community also looks into the possibilities of a country with no democracy likely to have the internal institutions experiencing state capture and inability to operate independently. The lack of independence in the major institutions like the judicial system, police department, and others gives the leader in position the unending latitude of sabotaging the rights of the citizens for their benefit.
Arab Spring and the rise of insurgency
From 2005 and beyond, many Arab countries staged anti-government protests occasioning misappropriation of funds, corruption, and economic stagnations experienced in the North African countries and the Middle East. The first incidence was witnessed in Tunisia, where many people claimed that the government was mismanaging natural resources available in the country and that such operatives were masked by corruption. Soon, the economic situation in the country was fist crumbling, prompting the need for a protest for the government to change norms and tact to improve the quality of life for the citizens (Herbert, 2018).
The uprising led to the formation of sects and rebel groups fighting the central government for equal distribution of resources (Herbert, 2018). The protests turned into terrorism and insurgency activities intending to compel the national governments of most of the Arab countries to foster the equal distribution of resources. It is worth noting that the countries in the regions are blessed with natural resources like oil and gas, making the leaders try as much as possible to stay in power to exploit such resources for personal gains. The primary lead that such leaders start with is sabotaging local institutions to favor their stay in power, contrary to the conventions of democracy. The far-reaching implication of insurgency development is the inability of international communities and business entities to enter into business deals with such countries for fear of the underlying hostility (Elsayed & Yarovaya, 2019).
The constant war leads to the displacement of people and forces some people to run as refugees into Europe while others also seek asylum in safe countries (Elsayed & Yarovaya, 2019). Such an occurrence limits the business space in such a country leading to a reduction in the number of investors showing interest in partnering with them even though they have natural resources. Therefore, natural resources appear as a curse and not a blessing as anticipated, especially if the involved countries do network to eliminate the risks of insurgency and terrorism. Extremism by such break-away entities within a country poses insecurity and uncertainty for businesses in a country, making those already established close down while presenting new ones from moving in to start up. This is a clear indication of how the economic aspects of a country are directly influenced by the prevailing political situation in the country in question.
Morocco, Lebanon, Iraq, and Algeria are among the leading countries where Arab spring was witnessed due to the leaders in power exploiting the citizens through corruption and sabotaging democratic processes (Elsayed & Yarovaya, 2019). The unyielding efforts of street protests led to the development of insurgent groups that worked to sabotage the government and create a just society where resources were dividend responsibly, and democratic processes were given space (Elsayed & Yarovaya, 2019). It is worth noting that this was not a success because institutions in these countries had been sabotaged and compromised. The compromise ensured that the efforts put forth in the streets by the citizens were in vain as the state operatives like the police would be used to threaten or kill the protestors. The justice system suffering from state capture would not guarantee the protestors a chance to compel the government of the day to reconsider making the country better through economic recovery, reducing corruption, and allowing democratic processes to take control. Such citizens would be left with no option apart from organizing into rebel groups conducting insurgencies to deal with the authoritarian government. The result would be a war field where the international communities would be finding difficulties engaging in businesses with them. Moreover, foreign investors, considering the need for peace and humanitarian considerations, would limit their involvement in such regions to challenge the leaders to accommodate what is suitable for all. To this end, it is clear that the FDI would not be an easy consideration since the business environment is unstable as occasioned by prevailing political hostility (Abdel-Latif, Elgohari & Mohamed, 2018).
Heterogeneous ethnicity in North African countries
Most African countries are sensitive to the various ethnic compositions of the societies making it volatile, especially in leadership rotation from one community to the other. The lack of tolerance among communities leads to a continuous urge to have each party of the large ethnic communities represented in the national government (Renzi, 2021). If such a representation is not met, or rotation of leadership is not maintained, the country risks entering into chaos like the one seen in Sudan and South Sudan. Nuer and Dinka communities have had a continuous push from all cadres to ensure that each community had a representation in the more prominent table and that resources were divided equally (Mohammed & Baba, 2021).
Insurgency and continuous war have been witnessed both in Sudan and South Sudan, leading to the destruction of properties and loss of life. Furthermore, many displacements have been witnessed, with many refugees moving to neighboring countries for safety. Asylum seekers also move to Europe, America, and Canada to leave their war-torn countries (Renzi, 2021). The implication of such a war is seen from an economic angle when the country cannot secure international investments due to the unending uncertainty in the political situation. Leaders refusing to transition through demarcating processes have as well seen myriads of groups rising in arms to keep the government in check to facilitate the peaceful transition. The changes in the political environment, especially in South Sudan, may run in the country’s history for years (Akuey, 2018).
Methodology
The research would be conducted by assessing real-time data available in history as recounted from countries in the North African countries as well as the Middle East countries. Twenty countries from the two regions, examined between 2005 and 2010, where such uprisings were rising, are used to inform the research hypothesis. A sample size of 20 countries would therefore be used for the investigation process, with all the countries selected for the process suspected to have had political instability between 2005 and 2010.
Again, the countries chosen are linked to possible political unrest brought about by the Arab spring or other economic issues that greatly affected peace in the country. The examination process of the countries focuses on how the political situations in the various countries implicate foreign relations and how the same affect FDI. Additionally, the issues that the chaos brought concerning the countries’ institutions and how the war changed the initial nature of significant institutions like the judiciary and the police.
Countries involved in the Arab spring from Africa included Morocco, Algeria, Tunisia, Sudan, South Sudan, and Djibouti. Middle East Iraq, Iran, Lebanon, Jordan, Kuwait, Oman, Palestine, Saudi Arabia, Yemen, Syria, Bahrain, UAE, Israel, Egypt, Libya, and Mauritania were involved in the spring (Elsayed & Yarovaya, 2019). It is worth noting that each country or region had varying but close effects of the war concerning the economy and national institutions’ integrity. The assessments of the countries involved would also see the research prosecute the underlying reasons that each group of protestors had in the various countries that prompted them to stage the protests against their governments. The economic implication experienced in each of the countries and regions as a result of the protest would also be assessed alongside how the international community, including the bodies facilitating FDI, responded to such increasing violence and political instability.
With the hypothesis in mind, it is anticipated that the economic situation in the various countries changed during the violence experienced in those countries as staged by the Arab spring. The Arab Spring was a wave of a wake-up call to bring order and accountability to various leaders whose tenures were characterized by corruption and mismanagement of funds. The natural resources were also a matter of concern as most countries listed are a host to natural oil, gas, and other valuable products. These resources have, in many instances, been exploited in a disputing manner, making members of the society protest for equity. Such observations would be analyzed to create an implication of the data obtained from the analyzed sample (Elsayed & Yarovaya, 2019).
Data analysis
A quantitative analysis will be performed, collected from several different datasets which have been found all available online. The dependent variable will be Foreign Direct Investment Inflows. The independent variable chosen is Political unrest & violence. Institutions in the particular countries would be used as constants since it is believed (hypothesized) that for a country experiencing political instability, there is a corresponding compromise in the major institutions like the judiciary. The government instigates the compromise to ensure that it favors it in all aspects at the expense of the citizens of that particular country. National political stability has a direct relationship with foreign direct investment since investors prefer to invest in a country where steady business processes are going on conventionally without any form of interference from political and social aspects. In the analysis, it is anticipated that all the countries in the North African region and the Middle East faced by the Arab spring all suffered political instability that reduced the FDI between 2005 and 2010. It is further anticipated that the riots and the corresponding political instability continued to affect the countries for many years after the stated 2010 period.
Results and discussion
Countries in the Middle East and North Africa that have experienced war-related political and economic issues underwent a period of the mucky business environment (Eaton et al., 2019). The FDI would be significantly minimized since the political instability would challenge many investors, especially in determining the suitable locations to invest in such countries. Again, the institutions in such countries continually operated under compromise to the extent that they would not be trusted to offer conventional services like justice to the citizens.
Compromise in institutions like the police and judiciary may be choreographed to facilitate the continuation of injustices by leaders in power. The bigger picture is the economic sabotage that the war in these countries brought to the citizens and the minimization of the international community’s ability to be involved in the investment process occasioned by the protests and calls on leaders to leave office (Elsayed & Yarovaya, 2019).
Conclusion
Countries undergoing political unrest face many economic challenges since the investment process is minimized due to the uncertainty and volatility of the political situation. FDI is greatly affected by the prevailing political situations, as evidenced in the countries in Northern Africa and the Middle East. FDI may not have successfully found investment avenues in the regions since the political temperature was heightened as occasioned by the uprising brought about by the Arab spring witnessed between 2005 and 2010 and the years that followed. It is worth noting that continued political instability in a country directly influences the operation of the national institutions to a point where they may not be trusted to discharge the required services conventionally. It, therefore, implies that a country facing political instability, as witnessed in the Arab countries of North Africa and the Middle East, is hindered from benefiting from the FDI and the institutions in the country.
References
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