Skip to main content Accessibility help
×
Home

Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries

  • Quan Li and Adam Resnick

Abstract

Does increased democracy promote or jeopardize foreign direct investment (FDI) inflows to less-developed countries? We argue that democratic institutions have conflicting effects on FDI inflows. On the one hand, democratic institutions hinder FDI inflows by limiting the oligopolistic or monopolistic behaviors of multinational enterprises, facilitating indigenous businesses' pursuit of protection from foreign capital, and constraining host governments' ability to offer generous financial and fiscal incentives to foreign investors. On the other hand, democratic institutions promote FDI inflows because they tend to ensure more credible property rights protection, reducing risks and transaction costs for foreign investors. Hence, the net effect of democracy on FDI inflows is contingent on the relative strength of these two competing forces. Our argument reconciles conflicting theoretical expectations in the existing literature. Empirical analyses of fifty-three developing countries from 1982 to 1995 substantiate our claims. We find that both property rights protection and democracy-related property rights protection encourage FDI inflows; after controlling for their positive effect through property rights protection, democratic institutions reduce FDI inflows. These results are robust against alternative model specifications, statistical estimators, and variable measurements.

Copyright

References

Hide All
Achen, Christopher H. 2000. Why Lagged Dependent Variables Can Suppress the Explanatory Power of Other Independent Variables Political Methodology Working Papers. Gainesville: Society for Political Methodology, University of Florida. Available at ⟨www.polmeth.ufl.edu/working00.alpha.html⟩.
Banks, Arthur S. 1999. Cross-National Time-Series Data Archive. Binghamton, N.Y.: Banner Software.
Bates, Robert H. 2001. Prosperity and Violence The Political Economy of Development. New York: Norton.
Beck, Nathaniel, and Katz, Jonathan. 1995. What to Do (and Not to Do) with Times-Series Cross-Section Data. American Political Science Review 89 (3):634–47.
Bergsten, C. Fred, Horst, Thomas, and Moran, Theodore H.. 1978. American Multinationals and American Interests. Washington, D.C.: Brookings Institution.
Bollen, Kenneth A., and Jackman, Robert W.. 1989. Democracy, Stability, and Dichotomies. American Sociological Review 54 (4):612–21.
Bornschier, Volker, Chase-Dunn, Christopher, and Rubinson, Richard. 1978. Cross-National Evidence of the Effects of Foreign Investment and Economic Growth on Inequality: A Survey of Findings and a Reanalysis. American Journal of Sociology 84 (3):651–83.
Burkhart, Ross E., and Lewis-Beck, Michael S.. 1994. Comparative Democracy: The Economic Development Thesis. American Political Science Review 88 (4):903–10.
Casper, Gretchen. 1995. Fragile Democracies. The Legacies of Authoritarian Rule. Pittsburgh, Pa.: University of Pittsburgh Press.
Caves, Richard E. 1971. International Corporations: The Industrial Economics of Foreign Investment. Economica 38 (149):127.
Caves, Richard E. 1996. Multinational Enterprise and Economic Analysis. 2d ed. Cambridge: Cambridge University Press.
Chan, Steve, and Mason, Melanie 1992. Foreign Direct Investment and Host Country Conditions: Looking from the Other Side Now. International Interactions 17 (3):215–32.
Clague, Christopher, Keefer, Philip, Knack, Stephen, and Olson, Mancur. 1996. Property and Contract Rights in Autocracies and Democracies. Journal of Economic Growth 1 (2):243–76.
Crenshaw, Edward. 1991. Foreign Investment as a Dependent Variable: Determinants of Foreign Investment and Capital Penetration in Developing Nations, 1967–1978. Social Forces 69 (4):1169–82.
Crystal, Jonathan. 1998. A New Kind of Competition: How American Producers Respond to Incoming Foreign Direct Investment. International Studies Quarterly 42 (3):513–43.
Dahl, Robert A. 1971. Polyarchy Participation and Opposition. New Haven, Conn.: Yale University Press.
Dahl, Robert A. 1998. On Democracy. New Haven, Conn.: Yale University Press.
de Soysa, Indra, and Oneal, John R.. 1999. Boon or Bane? Reassessing the Productivity of Foreign Direct Investment. American Sociological Review 64 (5):766–82.
Diamond, Larry. 1999. Developing Democracy Toward Consolidation Baltimore, Md.: Johns Hopkins University Press.
Dixon, William J., and Boswell, Terry. 1996. Dependency, Disarticulation, and Denominator Effects: Another Look at Foreign Capital Penetration. American Journal of Sociology 102 (2):543–62.
Dunning, John H. 1988. Explaining International Production. London: Unwin Hyman.
Dunning, John H. 1993. Multinational Enterprises and the Global Economy. Reading, Mass.: Addison-Wesley.
Enders, Walter, and Sandler, Todd. 1996. Terrorism and Foreign Direct Investment in Spain and Greece. Kyklos 49 (3):331–52.
Evans, Peter B. 1979. Dependent Development The Alliance of Multinational, State, and Local Capital In Brazil Princeton, N.J.: Princeton University Press.
Feng, Yi. 2001. Political Freedom, Political Instability, and Policy Uncertainty: A Study of Political Institutions and Private Investment in Developing Countries. International Studies Quarterly 45 (2):271–94.
Frieden, Jeffry A. 1994. International Investment and Colonial Control: A New Interpretation. International Organization 48 (4):559–93.
Garrett, Geoffrey. 1995. Capital Mobility, Trade and the Domestic Politics of Economic Policy. International Organization 49 (4):657–87.
Gastanaga, Victor M., Nugent, Jeffrey B., and Pashamova, Bistra. 1998. Host Country Reforms and FDI Inflows: How Much Difference Do They Make? World Development 26 (7):1299–314.
Goldsmith, Arthur. 1995. Democracy, Property Rights and Economic Growth. The Journal of Development Studies 32 (2):157–74.
Graham, Edward M. 1996. Global Corporations and National Governments. Washington, D.C.: Institute for International Economics.
Graham, Edward M., and Krugman, Paul R.. 1995. Foreign Direct Investment in the United States. 3d ed. Washington, D.C.: Institute for International Economics.
Greene, William H. 2000. Econometric Analysis. 4th ed. Upper Saddle River, N.J.: Prentice-Hall.
Gwartney, James, and Lawson, Robert with Samida, Dexter. 2000. Economic Freedom of the World 2000 Annual Report. Vancouver, Canada: Fraser Institute.
Haggard, Stephen. 1990. Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries. Ithaca, N.Y.: Cornell University Press.
Held, David. 1993. From City-States to a New Cosmopolitan Order? In Prospects for Democracy. North, South, East, West, edited by Held, David, 1352. Stanford, Calif.: Stanford University Press.
Held, David, McGrew, Anthony, Goldblatt, David, and Perraton, Jonathan. 1999. Global Transformations Politics, Economics and Culture. Stanford, Calif.: Stanford University Press.
Huber, John D. and Powell, G. Bingham. 1994. Congruence between Citizens and Policymakers in Two Visions of Liberal Democracy. World Politics 46 (3):291326.
Hymer, Stephen. 1976. The International Operations of National Firms. A Study of Direct Foreign Investment Cambridge, Mass.: MIT Press.
International Labour Office. 1999. Key Indicators of the Labor Market: 1999 Edition. Geneva: International Labour Organization.
International Monetary Fund. Various years. Annual Report on Exchange Arrangements and Exchange Restrictions Washington, D.C.: IMF..
Jackman, Robert. 1982. Dependence on Foreign Investment and Economic Growth in the Third World. World Politics 34 (2):175–96.
Jun, Kwang W., and Singh, Harinder. 1996. The Determinants of Foreign Direct Investment in Developing Countries. Transnational Corporations 5 (2):67105.
King, Gary. 2001. Proper Nouns and Methodological Propriety: Pooling Dyads in International Relations Data. International Organization 55 (2):497507.
Knack, Stephen, and Keefer, Philip. 1995. Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures. Economics and Politics 7 (3):207–27.
Kobrin, Stephen J. 1984. Expropriation as an Attempt to Control Foreign Firms in LDCs: Trends from 1960 to 1979. International Studies Quarterly 28 (3):329–48.
Leblang, David A. 1996. Property Rights, Democracy and Economic Growth. Political Research Quarterly 49 (1):526.
Levis, Mario. 1979. Does Political Instability in Developing Countries Affect Foreign Investment Flow? Management International Review 19 (3):5968.
Li, Quan, and Reuveny, Rafael. Forthcoming. Economic Globalization and Democracy: An Empirical Analysis. British Journal of Political Science.
Liang, Kung-Yee, and Zeger, Scott. L.. 1986. Longitudinal Data Analysis Using Generalized Linear Models. Biometrika. 73 (1):1322.
Linz, Juan. 2000. Totalitarian and Authoritarian Regimes Boulder, Colo.: Lynne Rienner.
Lipset, Seymour Martin. 1960. Political Man The Social Bases of Politics. Garden City, N.Y.: Doubleday.
London, Bruce, and Ross, Robert J. S.. 1995. The Political Sociology of Foreign Direct Investment: Global Capitalism and Capital Mobility, 1965–1980. International Journal of Comparative Sociology 36 (3–4):198219.
Londregan, John B., and Poole, Keith T.. 1996. Does High Income Promote Democracy? World Politics 49 (1).130.
Marshall, Monty G., and Jaggers, Keith. 2000. Polity IV Project: Political Regime Characteristics and Transitions, 1800–1999. Center for International Development and Conflict Management, University of Maryland. Available at: ⟨www.bsos.umd.edu/cidcm/inscr/polity/index.htm⟩.
North, Douglass C. 1990. Institutions, Institutional Change, and Economic Performance. Cambridge: Cambridge University Press.
North, Douglass C., and Weingast, Barry R.. 1989. Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. Journal of Economic History 49 (4):803–32.
O'Donnell, Guillermo. 1978. Reflections on the Patterns of Change in the Bureaucratic Authoritarian State. Latin American Research Review 13 (1):338.
O'Donnell, Guillermo. 1988. Bureaucratic Authoritarianism Argentina, 1966–1973 in Comparative Perspective. Berkeley: University of California Press.
Olson, Mancur. 1993. Dictatorship, Democracy, and Development. American Political Science Review, 87 (3):567–76.
Olson, Mancur. 2000. Power and Prosperity. Outgrowing Communist and Capitalist Dictatorships. New York: Basic Books.
Oman, Charles. 2000. Policy Competition for Foreign Direct Investment: A Study of Competition Among Governments to Attract FDI Paris: OECD..
Oneal, John R. 1994. The Affinity of Foreign Investors for Authoritarian Regimes. Political Research Quarterly 47 (3):565–88.
Oneal, John R., and Oneal, Frances H.. 1988. Hegemony, Imperialism, and the Profitability of Foreign Investments. International Organization 42 (2):347–73.
Pastor, Manuel Jr. and Hilt, Eric. 1993. Private Investment and Democracy in Latin America World Development 21 (4):489507.
Pastor, Manuel Jr. and Sung, Jae Ho. 1995. Private Investment and Democracy in the Developing World. Journal of Economic Issues 29 (1):223–43.
Przeworski, Adam. 1991. Democracy and the Market Political and Economic Reforms in Eastern Europe and Latin America. New York: Cambridge University Press.
Przeworski, Adam, and Limongi, Fernando. 1993. Political Regimes and Economic Growth. The Journal of Economic Perspectives 7 (3):5169.
Quinn, Dennis P. 1997. The Correlates of Change in International Financial Regulation. American Political Science Review 91 (3):531–51.
Quinn, Dennis P. 2000. Democracy and International Financial Liberalization. Unpublished manuscript, Georgetown University, Washington, D.C..
Resnick, Adam L. 2001. Investors, Turbulence, and Transition: Democratic Transition and Foreign Direct Investment in Nineteen Developing Countries. International Interactions 27 (4):381–98.
Reuveny, Ratael, and Li, Quan. Forthcoming Economic Openness, Democracy and Income Inequality: An Empirical Analysis. Comparative Political Studies.
Rugman, Alan M. 1981. Inside the Multinationals The Economics of Internal Markets. London: Croom Helm.
Schneider, Friedrich, and Frey, Bruno S.. 1985. Economic and Political Determinants of Foreign Direct Investment. World Development 13 (2):161–75.
Sobel, Andrew C. 1999. State Institutions, Private Incentives, Global Capital. Ann Arbor: University of Michigan Press.
Stimson, James A. 1985. Regression in Space and Time: A Statistical Essay. American Journal of Political Science 29 (4):914–47.
Stopford, John M., and Strange, Susan. 1991. Rival States, Rival Firms Competition for World Market Shares. Cambridge: Cambridge University Press.
Tarzi, Shah M. 1991. Third World Governments and Multinational Corporations: Dynamics of Host's Bargaining Power. International Relations 10 (3):237–49.
Teece, David J. 1981. The Multinational Enterprise: Market Failure and Market Power Considerations. Sloan Management Review 22 (3):317.
Tsai, Pan-Long. 1991. Determinants of Foreign Direct Investment in Taiwan: An Alternative Approach with Time-Series Data. World Development 19 (2–3):275–85.
United Nations Conference on Trade and Development (UNCTAD). 1997. World Investment Report 1997 Transnational Corporations, Market Structure and Competition Policy. New York: United Nations.
Vernon, Raymond. 1966. International Investment and International Trade in the Product Cycle. Quarterly Journal of Economics. 80 (2):190207.
World Bank. 1999. World Development Indicators Washington, D.C.: World Bank.

Related content

Powered by UNSILO

Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries

  • Quan Li and Adam Resnick

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed.