Political Institutions and Foreign Direct Investment in Developing Countries: Does the Sector Matter?

48 Pages Posted: 14 May 2009 Last revised: 5 Aug 2009

Date Written: May 13, 2009

Abstract

This paper examines the effect of regime type on FDI flows to developing countries. Existing research has been inconclusive, with some studies finding a positive effect of democracy, others finding a negative effect, and still others finding no clear relationship between regime type and FDI. This paper argues that the link between regime type and FDI operates on the industry level and that existing studies have reached conflicting results because they do not distinguish between different types of FDI. Statistical analysis of industry-level FDI flows to 44 developing countries between 1993 and 2003 shows that democracy has a positive effect on FDI seeking new markets or lower cost, but no effect on resource-seeking FDI. Democracy has negative effect on resource-seeking FDI in the research design used by existing studies, which may attenuate, offset, or outweigh the positive effect of democracy on market- and efficiency-seeking FDI. This suggests that the conflicting findings in the literature are due to differences in the time and country coverage of existing studies as the share of resource-seeking FDI in total FDI flows has varied both over time and across regions.

Keywords: Foreign Direct Investment, Regime Type, Developing Countries

JEL Classification: F21, F23, F59

Suggested Citation

Schulz, Heiner, Political Institutions and Foreign Direct Investment in Developing Countries: Does the Sector Matter? (May 13, 2009). Available at SSRN: https://ssrn.com/abstract=1403983 or http://dx.doi.org/10.2139/ssrn.1403983

Heiner Schulz (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

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