27 Second, brief periods of government instability can cause interruptions in FDI flows as investors "wait for the political dust to settle.' For instance, in the late 1970s, Kenya, which is widely perceived as a relatively stable political environment for FDI, suffered a 'hiatus of FDI that resulted from the death of Jomo Kenyatta [and] did not end until late 1979, following Arap Moils election as president" (Becsky, Lee, and Ordu 1990, chapter 7). Even quite brief and transient interludes of instability can lead to cancellations of FDI projects, not merely their deferral, because investors sometimes react strongly to the slightest hint of instability (Brewer, David, and Lim 1985, p.217). A different kind of instability--civil war--led to declines in FDI in Nigeria in the 1960s.

Several studies have tried to determine empirically the role of instability in investors' decisions about FDI projecta on the basis of systematically collected data. The studies have generally been of two kinds--those based on executives' answers to survey questions in interviews and questionnaires and those based on events and FDI data. The studies based on surveys consistently find that executives consider perceived host-country instability to be a major deterrent in FDI project location decisions (for example, Green 1972; Root 1968; Frank 1980, especially pp.111-12).

Other studies have also found significant effects of political instability on FDI flows. For instance, a study of foreign direct investments in manufacturing in twenty-four countries, including eleven developing countries, over the period from 1954 to 1975 by multinational corporations based in the United States was conducted to determine the relationship between FDI and political conflict (Nigh 1985). For the developing countries in particular, the study found that FDI flows were related to indicators of internal conflict such as riots and civil war; this was true for lags of zero to two years.

To the extent that political instability affects investors' perceptions of host-country conditions, and thus increases their uncertainties about the future environment for FDI, political instability can be a serious deterrent to FDI inflows. In addition, some forms of political instability can lead to instability in specific government policies that directly affect FDI projects. There is some evidence, however, that in this respect host-country political instability may not be as problematic as many investors believe. A study of governmental instability in developing countries found it to be only weakly related to instability in their restrictions on international funds transfers associated with FDI projects, and less so than among developed countries (Brewer 1983).

Instability in host countries therefore does not necessarily create an intolerable environment for successful FDI projects. There are many combinations of stability and instability, which vary considerably in how problematic they are for FDI. Some instances of host-country instability can be detrimental to the interests of FDI projects; other instances of host-country instability have relatively little bearing on FDI projects.

Another point that investors should keep in mind in their assumptions about