CHAPTER 2​ THEORETICAL FOUNDATION 2.1 Literature Review 2.1.1 The Importance and Determinants of FDI Foreign Direct Investment (FDI), refers to investments by residents aimed at controlling overseas business activities through asset ownership (Nguyen Phuc Canh et al., 2020). Firms FDI motives include resource-seeking, market-seeking, and efficiency-seeking (Dunning, 1992), with the OLI framework identifying ownership, location, and internalization advantages as key drivers (Dunning & Lundan, 2008). Previous studies identify economic and institutional factors as key determinants of FDI, shaping a country’s investment appeal and stability. Economic determinants include trade openness, inflation rate, and Gross Domestic Product (GDP) growth. Trade openness attracts greater FDI by reducing barriers, while low inflation is an indication of economic stability, hence a good business environment for investors (Mishra & Jena, 2019). Rising GDP growth rates increase FDI by signaling strong market potential, as shown in studies on countries like Argentina, Brazil, China, and South Korea (Hussain & Haque, 2016; Encinas-Ferrer & Villegas-Zermeño, 2015). For institutional determinants, property rights and political stability play critical roles. Strong property rights imply legal protection and lower risks of investments (Ali et al., 2010). Political stability reduces uncertainty and thus increases attractiveness to investors. Regime types also affect FDI patterns as they mould the way a country operates. Democratic regimes often attract horizontal FDI, while autocracies attract vertical FDI (Guerin & Manzocchi, 2007). However, the debate over which regime type exerts a greater influence on FDI remains unresolved (Guerin & Manzocchi, 2009 ; Tuman, 2006). While economic factors like GDP growth and trade openness are critical, previous studies clearly point to the significant role of political stability and institutional quality in safeguarding property rights and providing regulatory transparency as key determinants of FDI. However, much remains to be learned from how these factors vary in their importance across different regimes, which indicates a need for further empirical research to fully understand the complexities involved. 16 2.1.2 The Role of Political Stability in FDI Inflows Among the determining factors of FDI Inflow, one important factor is political stability (Shahzad & Al‐Swidi, 2013). A stable political environment ensures predictability and minimizes risks associated with political turmoil, making a country more attractive for long-term FDI and enhancing its appeal as an investment destination (Blouin et al., 2018; Abaidoo & Agyapong, 2021; Bremmer, 2005). On the other hand, political instability may also lower investment due to increased uncertainty and loss of confidence among investors that eventually affects economic growth (Jong‐A‐Pin, 2009; Uddin et al., 2018). Moreover, despite evidence suggesting political stability significantly influences FDI inflows, the relationship remains unclear, with some studies finding a strong positive correlation while others report no significant link (Rashid et al., 2017; Tian et al., 2017; Kurečić & Kokotović, 2017; Zangina et al., 2019). 2.1.3 Regime Type, Political Stability and FDI According to Levy et al (1995), regimes are social structures guiding state and citizen actions through informal and formal principles. There are two types of regimes, which are the democratic regime and the autocratic regime (Hyde & Saunders, 2020).