Courting Foreign Direct Investment from Diasporas: Are Diaspora Engagement Policies Effective? Under What Conditions?

Abstract

Although developing countries have developed various kinds of diaspora engagement policies (DEPs) to court foreign direct investment (FDI) from diaspora, we do not know whether these policies matter for investment promotion. Do DEPs contribute to attracting diaspora FDI? Under what conditions might DEPs be most effective at attracting this FDI? DEPs facilitate diaspora FDI by lowering legal, informational, and psychological barriers that diasporas confront when investing in the homeland. These barriers include FDI restrictions, information scarcity, and a lack of meaningful, harmonious ties to the homeland. DEPs are more effective in autocracies where high investment barriers exist and are especially so when they lower informational and psychological investment obstacles. An analysis of diaspora‐weighted FDI from the United States to 25 Asian countries from 2002–2011 lends some support to these claims. While DEPs do not affect diaspora‐weighted FDI flows per se, their positive impact is observed in autocracies, and DEPs' lowering of psychological obstacles drives this conditional impact.