Does geopolitical risk affect FDI? The conditioning role of institutional quality in emerging markets

The study examines the effect of geopolitical risk on FDI, with particular attention to how institutional quality moderates this relationship in emerging markets. The research employs a sample of 18 emerging market nations from 2003 to 2023. Using an unbalanced panel of 365 country–year observations, the study estimates two-way fixed-effects regression models utilising Driscoll-Kraay standard errors. The baseline results reveal a negative association between GPR and FDI when Rule of Law is held at zero, while the positive and statistically significant GPR × Rule of Law interaction indicates that stronger rule of law mitigates this negative association. The moderation result is also positive for Voice and Accountability and Regulatory Quality and marginally significant for Political Stability, but not statistically significant for Government Effectiveness or Control of Corruption. A composite governance measure likewise indicates significant conditionality, although the direction of the interaction depends on the orientation of the principal component. Additional robustness tests reveal heterogeneous conditioning effects. The natural resource rents and external debt interactions are insignificant, whereas the financial development interaction is negative and significant. Overall, the results highlight a conditional relationship rather than a uniform relationship with FDI and GPR across emerging markets.