Democracy and development: the case of foreign direct investment

Abstract

Foreign direct investment (FDI) contributes to the broad-based economic and social development of the recipient country. Scholars and economic policymakers have rigorously examined the variations in inward FDI flows mainly by economic and avoiding political variables. The motivation of the chapter is to examine FDI's variations concerning the host country's political surroundings. By reviewing empirical studies, this chapter identifies the political environment - inward FDI nexus and indicates whether the host country's political regime and political determinants impact on the level of inward FDI. Most research is supportive of the positive relationship between democracy and FDI or of specific attributes and institutional features in a democratic regime that stimulates FDI. Political determinants like, property rights protection, the signing of the bilateral investment treaties, human rights, and governance, contribute to the rise of the institutional stability and credibility of a regime and have a positive impact on FDI. Nevertheless, the debate on the impact of political regimes on inward FDI is hampered by contradictory empirical results and serious disagreements among political scientists and economists. The examination of the aforementioned factors is an attempt to provide, if possible, some conclusive answers to the dispute.