Political instability and political risk

Lack of political stability discourages inflows of FDI.Political risk arises because unexpected modifications of the legal and fiscal frameworks in the host country may change the economic outcome of a given investment in a drastic manner.For example, a decision by the host government to impose restrictions on capital repatriation to the investor’s home country will adversely affect the cash flows received by the parent firm from the foreign subsidiary located in the host country.