Effective Democracy, Economic Growth and Attractiveness to Foreign Investment

34 Pages Posted: 26 May 2020

See all articles by Debarati Basu

Debarati Basu

XLRI - Xavier School of Management

Shabana Mitra

Indian Institute of Management, Bangalore

Archana Purohit

affiliation not provided to SSRN

Date Written: April 20, 2020

Abstract

Democratization should make locations more favourable for MNEs internationalizing. Yet the association of democracy with economic growth and foreign investment remains inconclusive. Contrary to and in response to literature, we show that dichotomous and rules-based democracy measures have a U-shaped relation with GDP and FDI. We thus, create a novel index of effective democracy that is continuous and uses rules weighted by implementation. We then show a clear positive linear association of effective democracy with both GDP and FDI. This provides policy stakeholders a more robust way forward in understanding democratization. It also explains the MNE location choice decision better.

Keywords: Internationalization, Location Choice, GDP, FDI, Democracy Index, Measurement

JEL Classification: O11, O16, F34, F23

Suggested Citation

Basu, Debarati and Mitra, Shabana and Purohit, Archana, Effective Democracy, Economic Growth and Attractiveness to Foreign Investment (April 20, 2020). Available at SSRN: https://ssrn.com/abstract=3586268 or http://dx.doi.org/10.2139/ssrn.3586268

Debarati Basu (Contact Author)

XLRI - Xavier School of Management ( email )

C H Area (E), Jamshedpur, Jharkhand
831001
India

HOME PAGE: http://https://acad.xlri.ac.in/facprofile/index.php?701

Shabana Mitra

Indian Institute of Management, Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Archana Purohit

affiliation not provided to SSRN

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