Abstract
Least developed countries (LDCS) and developing countries desperately need foreign direct investment (FDI) for steady economic growth and sustainable development. Partly as a result of stiff competition due to globalization which brought about cross-border businesses through multi-national corporations (MNCs), those unfortunate economies are changing their policies and exerting their maximum potential to demonstrate themselves as favourable investment destinations in the eyes of MNCs. But, FDI comes to the host states only after thorough analysis of the benefits and costs because investors are motivated by making profits. Thus, obviously foreign direct investors opt for less risky investment. To achieve this, foreign direct investor’s seriously look in whether the host state is a democratic state, adopted functioning federalism, etc so that they would easily forecast the political risks against their investments. The tendency is that, investors will not come and continue their operations if the political risks are high while they do where the political risks are lower. However, the conceptual relationships among democracy, federalism and FDI inflows are still very concerning issues all over the world. This paper clearly shows as federalism and FDI inflows on one hand; democracy and FDI inflows on the other side are complementary than competing concepts. Federalism, democracy and FDI inflows have been regarded as a mutually reinforcing couple by many scholars to date. Hence, democratic and federal countries attract higher levels of FDI through ensuring the lowering of political risks. Keywords: - Foreign Direct Investment, Democracy, Federalism, MNCs. DOI: 10.7176/IAGS/68-02 Publication date: July 31 st 2020
Highlights
Unlike foreign portfolio investment which is an investment in stocks or bonds abroad, foreign direct investment (FDI) is an investment in real operations such as capital expenditures on fixed assets
While some studies report a positive relationship among democracy, federalism and FDI inflows, others show negative linkages among them
As different experimental investigations dictated, countries with better democracy and federalism in their governance has attracted and retained better and productive FDI inflows within their economy though this may not work for extractive investments up until 1970s
Summary
Unlike foreign portfolio investment which is an investment in stocks or bonds abroad, FDI is an investment in real operations such as capital expenditures on fixed assets. In a non-centralized political system, power is so diffused that it cannot be legitimately centralized or concentrated without breaking the structure and sprit of the constitution In this regard, Watts (2007) has found that federalist countries (such as the US and Canada) constitutionally grant constituent units substantial autonomy over several major policy areas while many countries which have been decentralizing cannot be federal because decentralization is not firmly ingrained in the political structure. Many LDCs implement federalism and decentralization in order to gain credibility in the political arena and achieve greater efficiency in terms of economic performance (Rizvanov, 2014) This contributes for the attraction and retention of FDI inflows in the LDCs. 2.2. The aggregate effect of the aforementioned virtues of federalism lowers political risks and instabilities in host states, ensures favourable investment climate, and boast investors’ confidence, and thereby contributes for attracting and retaining FDI inflows
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