Civil and Political Liberties and FDI: An Evaluation of Emerging and Developing Economies

Abstract

This chapter argues that foreign direct investment (FDI) has been embraced as a key driver of economic development and growth in host economies. Amongst the literature focusing on the determinants of FDI, a number of studies have considered the influence of the level of democracy in host countries on inward FDI and have reported contrasting results. To explain these inconsistencies, a recent strand of literature has focused on the disaggregated measures that constitute democracy of the host countries, mainly civil liberties and political rights. We argue that the effect of civil liberties and political rights will depend on the motivations of MNEs investing and will have a strong impact on the jobs created. We also argue that there is a positive moderating effect from the existence of human capital (semi and highly skilled) on the effect of political rights and civil liberties on the jobs created. We empirically test our hypotheses on a large sample of approximately 35,000 investment projects in 110 developing and emerging economies over the period 2003–2013. Our findings suggest that there is a non-linear relationship between civil liberties and FDI, and the existence of human capital does moderate the relationship in a positive way.