DEMAND SIDE DETERMINANTS OF FOREIGN DIRECT INVESTMENT--AN EMPIRICAL INVESTIGATION (POLITICAL RISK, CAUSAL MODEL, INTERNATIONAL INVESTMENTS)

During the last four decades, extensive literature has developed on the influence of host countries' economic, social and political environmental variables on the inflow of foreign direct investment. A central idea that emerges from these studies is the significance of environmental variables in explaining foreign direct investment. Despite the large body of research in this area, the relationships between environmental variables and foreign direct investment are not well established.;Six research hypotheses were developed which were tested hierachically. Starting with a simple two-construct model, the model was made more complex by incorporating additional constructs and linkages. Finally, the whole model with all the linkages specified was tested.;In the empirical results it was found that technological adaptation was positively related to quality of life and foreign direct investment, and negatively related to political risk. Quality of life was negatively related to foreign direct investment and positively related to political risk. Political risk was found to be positively related to foreign direct investment.;This study is based on a structural equations model with unobservable theoretical constructs which attempts to explain, in a causal sense, the influence of host countries' environments on the inflow of foreign direct investment from the United States. The use of a structural equations model requires an explicit delineation of the measurement properties of each construct and the causal relationships among constructs. This study recognizes that foreign direct investment can be explained by the interactions among three constructs: Technological adaptation, quality of life and political risk.