Political Instability and Investment Risk: The Paradox of Security Expenditures

Political instability remains one of the most formidable barriers to sustainable economic development and foreign investment. In regions plagued by conflict, weak governance, or institutional fragility, the business climate is inherently volatile. Yet, the role of state-level security expenditures in mitigating—or exacerbating—these risks remains underexplored. While direct empirical links between security spending and investment metrics like FDI are sparse, the indirect consequences of such expenditures on regulatory efficiency, investor confidence, and geopolitical risk are profound.

The Dual Edges of Security Spending

State-level security expenditures are often justified as tools to stabilize volatile environments. However, their effectiveness in reducing investment risk depends on how these funds are allocated. In Iraq, for example, persistent security threats—including terrorism and regional tensions—have kept the country in a “medium-high risk” category despite relative political stabilityIraq: SWOT Analysis and Risk Assessment, [https://www.specialeurasia.com/2024/02/21/iraq-swot-analysi-risk/]^[1]. The Iraqi government's efforts to attract investment through policies like Investment Law No. 13 of 2003 have been undermined by the inability to fully neutralize security risks, which continue to deter both foreign and domestic capitalIraq: SWOT Analysis and Risk Assessment, [https://www.specialeurasia.com/2024/02/21/iraq-swot-analysi-risk/]^[1]. This suggests that security spending, while necessary, is insufficient on its own to restore investor confidence if broader political and institutional weaknesses persist.

A 2024 study underscores this dynamic, noting that political stability—achieved through consistent governance, property rights, and contract enforcement—is a far stronger determinant of FDI than security expenditures aloneThe Influence of Political Stability on Foreign Direct Investment (FDI), [https://www.researchgate.net/publication/382832226_The_Influence_of_Political_Stability_on_Foreign_Direct_Investment_FDI]^[2]. In politically unstable regions, even robust security spending may fail to address root causes of instability, such as corruption or factional violence, which erode trust in institutions and create unpredictable regulatory environmentsIraq: SWOT Analysis and Risk Assessment, [https://www.specialeurasia.com/2024/02/21/iraq-swot-analysi-risk/]^[1].

Regulatory Efficiency and the Shadow of National Security

The interplay between security expenditures and regulatory efficiency further complicates the investment landscape. As geopolitical tensions rise, governments increasingly prioritize national security in investment decisions, leading to stricter screening regimes for foreign capital. For instance, the European Union and the United States have expanded their scrutiny of investments in sensitive sectors like semiconductors and artificial intelligence, citing economic security concernsEconomic Statecraft: How the Emerging Front in National ... [https://www.debevoise.com/insights/publications/2025/07/economic-statecraft-how-the-emerging-front-in-nat]^[3]. While these measures aim to protect domestic industries, they also fragment global investment norms and heighten transaction costs for multinational corporationsEconomic Statecraft: How the Emerging Front in National ... [https://www.debevoise.com/insights/publications/2025/07/economic-statecraft-how-the-emerging-front-in-nat]^[3].

This trend reflects a broader shift: investment risk is no longer confined to traditional metrics like GDP growth or inflation. Instead, it is increasingly shaped by the intersection of political instability, regulatory barriers, and geopolitical competitionResponses of FDI to geopolitical risks: The role ... [https://www.sciencedirect.com/science/article/pii/S0969593123000367]^[4]. In regions where state security expenditures are driven by external threats—such as those in the Middle East or Eastern Europe—investors face a dual challenge: navigating local instability while complying with evolving global security mandatesEconomic Statecraft: How the Emerging Front in National ... [https://www.debevoise.com/insights/publications/2025/07/economic-statecraft-how-the-emerging-front-in-nat]^[3].

The Path Forward: Governance as a Catalyst

The evidence points to a critical insight: security expenditures must be paired with institutional reforms to meaningfully reduce investment risk. Countries with strong governance frameworks—transparent regulatory processes, low corruption, and consistent policy application—tend to attract higher FDI per capita, even in politically volatile regionsThe Influence of Political Stability on Foreign Direct Investment (FDI), [https://www.researchgate.net/publication/382832226_The_Influence_of_Political_Stability_on_Foreign_Direct_Investment_FDI]^[2]. For example, nations that integrate security spending with efforts to strengthen property rights and streamline bureaucratic processes can create a more predictable environment for investorsThe Influence of Political Stability on Foreign Direct Investment (FDI), [https://www.researchgate.net/publication/382832226_The_Influence_of_Political_Stability_on_Foreign_Direct_Investment_FDI]^[2].

However, this requires political will. In Iraq, delayed government formation and unresolved factional disputes have repeatedly stalled progress, illustrating how institutional gridlock can negate even well-intentioned security investmentsIraq: SWOT Analysis and Risk Assessment, [https://www.specialeurasia.com/2024/02/21/iraq-swot-analysi-risk/]^[1]. Conversely, regions that leverage security expenditures to build trust—through public-private partnerships or community-based initiatives—may find greater success in attracting capitalResponses of FDI to geopolitical risks: The role ... [https://www.sciencedirect.com/science/article/pii/S0969593123000367]^[4].

Conclusion

Political instability and its impact on investment risk are inextricably linked to how states manage security expenditures. While these funds can address immediate threats, their long-term efficacy in fostering a favorable business climate depends on complementary institutional reforms. Investors must remain vigilant, recognizing that security spending alone cannot substitute for political stability or regulatory efficiency. For policymakers, the lesson is clear: economic recovery in unstable regions requires not just military or intelligence solutions, but a holistic commitment to governance and transparency.