How Do Different Types of FDI Affect Democracy ? (original) (raw)
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Foreign Policy Analysis, 2008
The effect of regime type on inflows of foreign direct investment (FDI) remains a matter of controversy. While some studies report a positive influence of democracy on FDI, others show a negative influence. This study reexamines this discrepancy using pooled panel data during the past 20 years and contributes to the existing literature in three ways. First, it refines the causal mechanisms underlying the democracy-related arguments of veto players, audience costs, and democratic hindrance with respect to foreign investment. Second, it introduces three accurate measures to capture each of those three causal arguments. Third, it briefly demonstrates how different measurements of the dependent variable can produce statistically spurious results. The empirical results reveal that democratic institutions are, at best, weakly associated with increases in FDI inflows (measured by FDI ⁄ GDP ratios). While multiple veto players (and, counterintuitively, democratic hindrance) may be positively associated with increases in FDI, audience costs are not linked to FDI activities. These findings have important policy implications given that developing democratic countries are trying to attract more FDI in order to achieve their economic growth and development targets.
International Organization, 2003
Increasing economic globalization and the diffusion of political democracy are arguably the two most important characteristics of contemporary international political economy+ As a salient dimension of globalization, foreign direct investment FDI! inflows have grown faster than world income since the 1960s, multinational enterprises~MNEs! now account for about 70 percent of world trade, and the sales of their foreign affiliates have exceeded total global exports+ 1 Foreign production capital has dispersed to almost all developing countries since the 1980s, and the number of foreign affiliates located in developing economies has reached 129,771, compared with 93,628 in the developed world+ 2 Paralleling this economic structural change is the spread of liberal or representative democracy+ A growing number of less-developed countries~LDCs! have experienced increased political participation, open competition for elected office, and expanding civil society+ The proportion of democratic and partially democratic countries rose from about 31 percent in 1975 to about 73 percent in 1995+ 3
Foreign direct investment and economic growth: the role of democracy
2019
This study investigates the growth-effect of foreign direct investment (FDI) in 67 developing countries covering from 1984 to 2016, with a special emphasis on the role of democracy. The empirical results obtained from generalized method of moments (GMM) estimation demonstrate that democracy plays a crucial role in moderating the positive effect of FDI on output growth. The results are robust to several alternative measures of democracy and FDI. This suggests that the marginal effect of FDI on growth depends on the level of democracy such that countries which promote democratic institution benefit more from FDI inflows. The finding is consistent with the growing view that the growth-effect of FDI depends on other intervening factors in the host countries.
Why Do Democracies Attract More or Less Foreign Direct Investment? A Meta-Regression Analysis
A large body of research examines the relationship between democracy and foreign direct investment (FDI). Scholars offer numerous arguments about why democratic institutions encourage or discourage FDI. Yet almost all extant empirical work concerns whether democracies receive more or less FDI than non-democracies; direct evidence on the underlying theoretical mechanisms is scant. In this paper, we seek to fill this gap. We argue that by performing meta-regression analysis, we can test whether a proposed mechanism is consistent with observable evidence from previous studies or not. We apply meta-regression to 229 model estimates from 40 prior studies. Our analysis produces three main results concerning theoretical mechanisms, FDI measurement, and publication bias. First, previous arguments about property rights, exchange rate volatility, and political constraints receive robust support among studies of the level of FDI inflows, and the mechanisms of growth and domestic political risk receive relatively robust support among studies of FDI inflows as a share of GDP. Second, the determinants of the effect of democracy differ between the two FDI measures. Third, we uncover strong and nuanced patterns of publication bias in previous studies. These findings have important implications for future research.
Do Democratic Institutions suppress FDI inflows? A response to Li and Resnick (2003)
This paper aims to argue against three arguments made by Li and Resnick in their 2003 paper: Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries, International Organization, 57: 175–211. Li and Resnick explain why democracy and democratic countries do not promote FDI inflows in a host country, based on three aspects: monopoly rents, industrial policy; and incentives and so-called sweet deals. They indicate how these three aspects in a democracy produce suppressive effects on FDI inflows. In our research note, we indicate why these three arguments are invalid. We first present each of the three arguments made by Li and Resnick. Then, we provide counter arguments, based on various sources. We show how the arguments made by Li and Resnick are invalid, and that democracy, in fact, does not produce suppressive effects on FDI inflows. On the contrary, we argue that democracy does support FDI inflows more than it suppresses it.
DergiPark (Istanbul University), 2022
The present study investigates the relationship between democratic practice and foreign direct investment (FDI) in Bangladesh. There is an ongoing debate in academia regarding the effect of democracy on FDI inflow. Historically, FDI depends on stable democracy apart from many other relevant factors. This study used time series data from 1975 to 2015 for Bangladesh and estimated suitable econometric models. This study showed that the relationship between democracy and FDI is statistically insignificant in the long run.
Democratic transition and foreign direct investment: Transition process matters
2015
This paper provides evidence on the relationship between foreign direct investment (FDI) and democratic transition. We propose first an econometric analysis of the determinants of the democratization process through a "probit" model. We consider a sample of 173 countries, with 44 that have experienced a democratic transition over the period 1980-2010. Our results reveal that variables related to human development and individual freedom facilitate the initiation of the democratic process in contrast to those related to social heterogeneity. In the second part, we study the impact of the democratic transition on FDI inflows. In order to avoid endogeneity, we limit the analysis to countries in transition and similar ones deduced from a matching process carried out after the first part. Our results confirm that democratic transitions lead to a significant increase in FDI inflows