This paper examines empirically the effects of Political Risk on Japanese Outward Foreign Direct Investments (FDI). The main purpose is to investigate hypothesis of Political Risk significance for the Japanese MNEs within the investment process. The empirical model is based on two theoretical frameworks, namely OLI (Ownership, Location and Internalization) framework and Knowledge Capital Model. In addition to Political Risk a number of traditional FDI determinants are included as control variables: Gross domestic product (GDP), Labor cost, investment cost, trade cost and others. Two more variables – technological index and national culture index - are considered by the model in order analyze its significance and probable interaction with political risk variable.
The empirical analysis is based on the panel data set that includes data on the Japanese Outward FDI flows to 30 Asian and European countries for the period of 14 years (1995-2008). A number of econometric methods is used in order to provide evidences for the established hypothesis. Main results and conclusions are based on the Generalized Method of Moments (GMM) specification.
The expected result is that Political Risk variables in interaction with traditional and newly introduced ones explain reasonably the Japanese Outward FDI flows.
Key words: foreign direct investments, multinational corporations, political risk