Foreign Direct Investment and Democracy

TL;DRAbstract

Foreign Direct Investment (FDI) is a focal point of empirical research and government policies. Developing nations are becoming increasingly reliant on international capital flows in the form of FDI. This is because FDI can create positive externalities that lead to higher rates of growth. In addition, FDI is a form of long-term investment that is able to withstand crises more effectively. The increased democratization of least developed nations infers that the relationship between democracy and FDI needs to be empirically established. I utilize the Democracy and Dictatorship dataset to empirically estimate the effect of democracy on FDI (inflows and as % of GDP) in a dynamic panel data model. Specifically, I utilize generalized method of moments (GMM) estimators. Accounting for endogeneity, I find evidence that there is no relationship between democracy and FDI.

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