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Do Foreign Investors Punish Democracy? Theory and Empirics, 1984-2001

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  • Jo Jakobsen
  • Indra de Soysa
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    Abstract

    Some claim that when level of property rights protection is controlled, democracy lowers foreign direct investment (FDI) to developing countries ( Li and Resnick 2003 ). We critically examine the theoretical claims of the pessimistic arguments and show that FDI responds to preferences of countries and that democracies have a clear preference for FDI given that the scarce factor - capital - will find it harder under democracy to seek rents by raising barriers to entry. On the other hand, labor (the abundant factor in developing countries) should profit from lower barriers to capital importation. We demonstrate conclusively that the most prominent pessimistic result on democracy in the literature is simply an artefact of sample size and testing procedure. We establish robust evidence suggesting that developing country democracies actually receive higher inflows of FDI, net of a number of control variables. Consistent with our view that host nations' attitudes are shaped by factor endowments, which in turn determine rent-seeking, we demonstrate that governments controlled by 'leftist' political parties also receive more FDI than 'centrist' or 'rightist' governments among democracies. Why this should be true is not obvious from a theory based on property rights risk alone. An extended sample of LDCs and a better operationalization show that property rights and democracy positively affect FDI. Our results suggest that globalization advances the fortunes of democracies in the developing world. Copyright 2006 Blackwell Publishing Ltd..

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Kyklos.

    Volume (Year): 59 (2006)
    Issue (Month): 3 (08)
    Pages: 383-410

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    Handle: RePEc:bla:kyklos:v:59:y:2006:i:3:p:383-410

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0023-5962

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    Cited by:
    1. Céline Azémar & Rodolphe Desbordes, 2008. "Public Governance, Health and Foreign Direct Investment in Sub-Saharan Africa," Working Papers 2009_04, Business School - Economics, University of Glasgow.
    2. Ram Mudambi & Pietro Navarra & Andrew Delios, 2013. "Government regulation, corruption, and FDI," Asia Pacific Journal of Management, Springer, vol. 30(2), pages 487-511, June.
    3. Paniagua, Jordi & Sapena, Juan, 2014. "Is FDI doing good? A golden rule for FDI ethics," Journal of Business Research, Elsevier, vol. 67(5), pages 807-812.
    4. Ledyaeva, Svetlana & Karhunen, Päivi & Kosonen, Riitta, 2013. "Birds of a feather: Evidence on commonality of corruption and democracy in the origin and location of foreign investment in Russian regions," European Journal of Political Economy, Elsevier, vol. 32(C), pages 1-25.
    5. Krishna Chaitanya Vadlamannati & Arusha Cooray, 2012. "What Drives FDI Policy Liberalization? An Empirical Investigation," CAMA Working Papers 2012-27, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Eva Rytter Sunesen, 2009. "Examining the Regional Aspect of Foreign Direct Investment to Developing Countries," Discussion Papers 09-02, University of Copenhagen. Department of Economics.
    7. Blanco, Luisa R., 2012. "The Spatial Interdependence of FDI in Latin America," World Development, Elsevier, vol. 40(7), pages 1337-1351.

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