Assessing the moderating effects of economic performance indicators on political risk-induced divestment in CEE Countries

Abstract This study examines how macroeconomic performance moderates the link between political risk and foreign direct divestment (FDD) in Central and Eastern European (CEE) economies. Grounded in Dunning’s ownership–location–internalisation paradigm and obsolescing bargain theory, it views divestment as a strategic response to changing institutions, macroeconomic conditions, and the evolving bargaining power between multinationals and host governments. Using panel data for 11 CEE countries from 2002 to 2019 and feasible generalised least squares (FGLS) to address heteroskedasticity, autocorrelation, and cross-sectional dependence, the study analyses direct and moderating effects of economic performance. Political stability, labour force participation, corporate taxation, and trade openness significantly affect divestment. Strong economic growth weakens the positive association between political instability and divestment, indicating that favourable growth encourages investment retention. In contrast, inflation strengthens this association, showing that macroeconomic instability limits the ability of political stability to retain foreign capital. FDD thus reflects firms’ reassessment of ownership advantages and location-specific conditions rather than simple political or economic decline. The study enriches FDI research by jointly considering political and economic drivers of divestment and offers policy guidance to bolster institutional credibility, macroeconomic resilience, and labour-market efficiency to support long-term investment retention in CEE economies.