Socio-economic instability and its effect on private sector investment

Document Type : RESEARCH PAPER

Authors

1 Ph.D. Candidate, Department of Economics, Faculty of Economic and Political Sciences, University of Shahid Beheshti, Tehran, Iran

2 Professor, Department of Economics, Faculty of Economic and Political Sciences, University of Shahid Beheshti, Tehran, Iran

3 Assistant Professor, Department of Economics, Faculty of Economic and Political Sciences, University of Shahid Beheshti, Tehran, Iran

Abstract

The unstable, insecure and high-risk environment reduces the willingness of investors to invest in that society. When talking about a stable environment, all economic, social, financial, etc. aspects are taken into consideration, which have not been given the attention of researchers in its comprehensive sense. In the current research, using the econometric methods of PCA, ARCH-GARCH, ARDL and statistics from 1991 to 2022, using a set of variables in the economic, social and financial sectors; A general index for instability and risk has been created and along with key variables such as bank facilities and credits, military budget (political security) and total production, their effect on private sector investment has been estimated. Therefore, economic instability has the least impact compared to other instabilities, and it becomes necessary to pay attention only to instability in economic variables cannot reduce uncertainty to the desired level; Rather, the society should be considered from all aspects in curbing instability.
Conclusion:
In Iran, as expected, investment is faced with uncertainties consisting of instability in the economic environment, anomalies and instability in the social sphere, and risk in the financial markets, which significantly affect the investment process of the private sector. and have caused a decrease in it. Therefore, with a more comprehensive look at the problem of instability and the analysis of the effect of systemic thinking, it becomes necessary to pay attention to investment and the effect of instability on it, only in economic variables, it cannot reduce uncertainty to the desired level; Rather, the society should be considered from all aspects in curbing instability. Therefore, the managers of the country in different sectors, especially economic and social, should implement policies that reduce instability in these sectors in order to create a safe and reliable environment for economic activities, especially investment.

Keywords

References

Aboura, S., & Van Roye, B. (2017). Financial Stress and Economic Dynamics: The Case of France. International Economics, 149(1), 57-73.
Addison, D., & Quentin, W. (2007). Macroeconomic Volatility, Private Investment, Growth, and Poverty in Nigeria. Munich Personal RePEc Archive Paper, 11113 (5), 123-37.
Afonso, A., & Furceri. D. (2008). Government Size, Composition, Volatility and Economic Growth. Working Paper Series, No. 849: 1-43.
Ahmad, I., & Qayyum, A. (2008). Effect of Government Spending and Macro- Economic Uncertainly on Private Investment in Services Sector: Evidence from Pakistan. European Journal of Economics, Finance and Administrative Sciences, 11, 84-96.
Aizenman, J., & Nancy. M. (1999). Volatility and Investment: Interpreting Evidence from Developing Countries. Economica, 66 (4), 157-79.
Ali, A., & Rehman, H. (2015). Macroeconomic Instability and Its Impact on Gross Domestic Product: An Empirical Analysis of Pakistan. Pakistan Economic and Social Review, 53(2), 285-316.
Alon, I., & Herbert, T. T. (2009). A stranger in a strange land: Micro political risk and the multinational firm, Business Horizons, 52(2), 127-137.
Alptekin, A., & Levine, P. (2012). Military Expenditure and Economic Growth Literature: A Meta-Analysis. European Journal of Political Economy, 28(4), 636-650.
Bahmani-Oskooee, M., & Hajilee, M. (2013). Exchange Rate Volatility and Its Impact on Domestic Investment. Research in Economics, 67(1), 1-12.
Bambe, B. WW. (2023). Inflation Targeting and Private Domestic Investment in Developing Countries. Economic Modelling, 125, 106353.
Behnamian, M., Shojaei, A., & Haji, Gh. (2022). Predicting the Dynamics of Private Sector Investment in Iran. Qouarterly Journal of Applied Econimics Studies Iran, 40(10). 147-179. (In Persian)
Benoit, E. (1978). Growth and Defence in Developing Countries. Economic Development and Culture Change, 26, 271-280.
Beyzayee, B. (1997). Economic review of military spending. Journal of Knowledge and Development, 6&7, 75-116. (In Persian)
Borumand, sh. (2008). Corruption, private sector investment and economic growth (case study: Iran). Quarterly Journal of Quantitative Economics, 5(2), 107-129. (In Persian)
Brillet, J. L. (2015). Macro Econometric Modelling: A Practical Approach under Eviews, with a Focus on Africa. AGRODEP Technical Note, 11, 125-175.
Cambón, M. I., & Estévez, L. (2016). A Spanish Financial Market Stress Index (FMSI). Spanish Review of Financia & Economics, 14(1), 23–41.
Cevik, E. I., Dibooglu, S., & Kutan, A. M. (2013). Measuring Financial Stress in Transition Economies. Journal of Financial Stability, 9(4), 597–611.
Dargahi, H., & Nikjoo, F. (2013). A Financial Stress Index for the Economy of Iran and its Impacts on Economic Growth. Economic Research, 47(4), 19-40. (In Persian)
Darku, A. B. (2000). Private Investment, Uncertainty, and Irreversibility in Uganda. African Finance Journal, 3 (1), 1-25.
Demirhan, E., Masca, M. (2008). Determinants of foreign direct investment flows to developing countries: a cross-sectional analysis. Prague economic papers, 4(4), 356-369.
Dhonte, P., & Shan, K. (1997). Toward a Market Economy: Structure of Governance. IMF working paper. No. 11.
Ditta, A., & Hayat, M. A. (2017). Macroeconomic instability and its role on income inequality in developing countries: A Panel Data analysis. Pakistan Economic and Social Review, 55 (2), 613 -636.
Elyaspour, B., Dashtban, M., & Dashtban, S. (2018). The Effect of Public Expenditure and Macroeconomic Uncertainty on the Private Sector Investment in Iran. Journal of Economics and Modelling, 9(2), 67-99. (In Persian)
Erramilli, M. K., & Rao, C. P. (1993). Service firms' international entry-mode choice: A modified transaction-cost analysis approach, The Journal of Marketing, 57(3), 19-38.
Fischer, S. (1993). The Role of Macroeconomic Factors in Growth. NBER Working Paper Series, No. 4565.
Fukuyama, F. (1997). Social Capital, The Tanner Lectures on Human Values, Brasenose College, Oxford.
Gastanaga, V. M., Nugent, J. B., & Pashamova, B. (1998). Host country reforms and FDI inflows: How much difference do they make?. World development, 26(7), 1299-1314.
Gilakhakimabadi, M, T., Zaroki, Sh., & Hasanzade, SH. (2017). The Effect of Macroeconomic Instability on Financial Crimes in Iran. Strategic Research on Social Problems, 16(6), 29-46. (In Persian)
Grosse, R., & Trevino, L. J. (1996). Foreign direct investment in the United States: An analysis by country of origin, Journal of international business studies, 27(1), 139-155.
Hadian, E., & Tahvili, A. (2015). The effects of Fiscal Policy Uncertainty on Private Investment in Iran. Qouarterly Journal of Applied Econimics Studies Iran, 12(3), 91-110. (In Persian)
Hjerppe, R. (2003). Social Capital and Economic Growth. International Conference on Social Capital, arranged by Economic and Social Research, Tokyo: Institute of Japanese Government, March, 24-25.
Hollo, D., Kremer, M. & Duca, L. M. (2012). CISS- a Composite Indicator of Systemic Stress in the Financial System. Working Paper, No: 1426, European Central Bank.
Hosseinidoust, S. E., Nasrollahi, R., & Jafari, A. (2022). The Investigation of the Factors Affecting Financial Instability in Developing Countries: The SGMM Approach. Stable Economy Journal, 3 (1), 132-160. (In Persian)
Hubrich, K., & Tetlow, R. (2015). Financial Stress and Economic Dynamics: the Transmission of Crises. Journal of Monetary Economics, 70(C), 100–115.
Illing, M., & Liu, Y. (2006). Measuring Financial Stress in a Developed Country: An Application to Canada. Journal of Financial Stability, 2(3), 243-265.
Iqbal, N., & Nawaz, S. (2010). Fiscal Decentralization and Macroeconomic Stability: Theory and Evidence from Pakistan. Pakistan Institute of Development Economics, Islamabad
Ismihan, M. (2003). The Role of Politics and Instability and Public Spending Dynamics and Macroeconomic Performance: Theory and Evidence from Turkey. PH.D Thesis. METU, Ankara.
Jeong, B. (2002). Policy Uncertainty and Long run Investment and Output Across Countries. International Economic Review, 43(2), 363-92.
Jinjarak, Y. (2007). Foreign direct investment and macroeconomic risk. Journal of Comparative Economics, 35(3), 509-519.
Karshenasan, A. (2005). Examining uncertainty in macroeconomics and its impact on private investment in OPEC countries. PhD dissertation, The University of Tehran. (In Persian)
Kasatuka, C., & Minnitt, R. C. A. (2006). Investment and non-commercial risks in developing countries. Journal of the Southern African Institute of Mining and Metallurgy, 106, 849-856.
Keshavarz, H., & Rezaei, M. (2021). Political, Financial and Economic Instability in the Iran Economy: Dimensions and Factors. International Political Economy Studies, 4(2), 691-724. (In Persian)
Khezri, H., Najimeydani, AA., & Karimzadeh, M. (2014). The Effect of Exchange Rate Volatility on the private sector consumption in Iran (1352-90). Iranian Journal of Economic Research, 59(19), 211-236. (In Persian)
Krokida, S., Makrychoriti, P., & Spyrou, S. (2020). Monetary Policy and Herd Behavior: International Evidence. Journal of Economic Behavior & Organization, 170, 386-417.
Miglietta, A., & Venditti, F. (2019). An Indicator of Macro-Financial Stress for Italy. Bank of Italy Occasional Paper.
Mohammadzadeh, Y., Jahangiri, Kh., Refahkahriz, A., & Valizadeh, E. (2018). The effect of property rights and political risk to attract foreign direct investment using with PVAR approach. Qouarterly Journal of Applied Econimics Studies Iran, 26(7), 115-134. (In Persian)
Mohammadifard, F., Mehrara, M., & Barkhordari, S. (2023). Investigating the effects of financial instability on macroeconomic variables with time-varying vector autoregression (TVP-VAR). Stable Economy Journal, 10(4), 26-47. (In Persian)
Mostafazadeh, m., Davoodi, P., Samsami, H., & Arabmazar, AA. (2024). The Effect of Political Management and Economic Stability on Speculation in Iran's Economy. Applied Theories of Economics, 40(1), 175-206. (In Persian)
Patillo, C. (1998). Investment, Uncertainty and Irreversibility in Ghana. IMF Staff Paper, 45(3), 1-37.
Pereira, R. M. (2008). Investment and Uncertainty in Machinery and Real Estate. Revista Brasileira de Economia, 62(3), 279-298.
Pieroni, L. (2009). Military Expenditure and Economic Growth. Defence an Peace Economics, 20(4), 327-339.
Sawadogo, R. F. (2024). Do Fiscal Rules Shape Private-Sector Investment Decisions?. Journal of Macronomics, 81, 103617.
Serven, L. (1998). Macro Economic Uncertainity and Private Investment in Developing Countries an Empirical Investigation. Policy Research Working Paper, 2035, World Bank, Development Research Group, Macro economics and Growth.
Shahbaz, M. (2013). Linkages between inflation, economic growth and terrorism in Pakistan. Economic Modelling, 32, 496-506.
Stona, F., Morais, I. A., & Triches, D. (2018). Economic Dynamics During Periods of Financial Stress: Evidences from Brazil. International Review of Economics & Finance, 55(C), 130-144.
Stroup, M. D., & Heckelman, J. C. (2001). Size of the Military Sector and Economic Growth: A Panel Data Analysis of Africa and Latin America. Journal of Applied Economics, 2, 329-360.
Tavares, J. (2009). Economic integration and the comovement of stock returns. Economics Letters, 103(2), 65-67.
Tuman, J. P., & Shirali, M. (2017). The political economy of Chinese foreign direct investment in developing areas. Foreign Policy Analysis, 13(1), 154-167.
Tuncay, M. (2014). Finansal Piyasalardaki Sermaye Varliklarinin Degerlemesinde Politik Risklerin, Etkisi: Turkiye Uygulaması. PhD Dissertation, Cumhuriyet Universitesi, Sosyal Bilimler Enstitusu, Sivas
Wafo, G. L. K. (1998). Political Risk and Foreign direct Invastment. Faculty of Economics and Statistics, University of Konstanz, Germany.
Wisniewski, T. P., & Pathan, S. K. (2014). Political environment and foreign direct investment: Evidence from OECD countries. European Journal of Political Economy, 36l, 13-23.
Zaroki, Sh., Abdi, S, M., & Yousefi, B, A. (2021). Analyzing the Role of Macroeconomic Instability on Income Inequality in Iran. The Economic Research, 21(4), 37-63. (In Persian)

Files

Share

How to cite

Statistics