The Impact of Democracy on Foreign Direct Investment in high and Low Democratic Countries; A Comparative Study

Abstract

Generally Speaking, investment is the heart of economic growth and development. Financing investment, on the other hand, is one of the major economic challenges, and yet, this is a very crucial issue in developing countries. Investment is made in the form of domestic and foreign investment, and therefore foreign investment is affected by economic and political conditions. Therefore, in this study, the effect of democracy on direct foreign investment has been done among two selected groups of countries including those with high and those with low level of democracy from 2001 to 2015 using panel data method. The results showed that democracy has a significant and direct impact on FDI in countries with high and low democracy, while the effect of democracy on FDI in countries with low democracy is much greater than in countries with high democracy. Besides, fixed capital formation, economic growth rate, literacy rate, exchange rate, trade and government size have direct and significant effects on FDI in countries with low democracy. However, in countries with a high level of democracy, exchange rates and government size have a significant negative impact on foreign direct investment.