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Under Which Condition Does the Democratization of the Arab World Improve FDI?

Author

Listed:
  • Nouha Bougharriou

    (University of Sfax)

  • Walid Benayed

    (Higher Institute of Management of Gabes)

  • Foued Badr Gabsi

    (Faculty of Economics and Management of Sfax)

Abstract

This paper examines the relationship between democracy and foreign direct investment (FDI) in the Arab World over the period 2002–2013. The results show strong evidence of an inverted U-shaped relationship between democracy and FDI. This means that democratization should only be FDI-fostering if a country is not sufficiently democratic. In an attempt to explain these findings, we show that the asymmetric effects of democracy on FDI stem from the U-shaped democracy–taxation path. That is, at earlier stages of democratization, democracy is associated with lower taxation levels, which promotes FDI. However, when a certain level of democracy is reached, a deeper democratization would increase taxation, which hampers FDI. Hence, a moderate improvement in political and civil freedoms seems to be a key prerequisite to attract more FDI in authoritarian Arab countries.

Suggested Citation

  • Nouha Bougharriou & Walid Benayed & Foued Badr Gabsi, 2021. "Under Which Condition Does the Democratization of the Arab World Improve FDI?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(2), pages 224-248, June.
    • Handle: RePEc:pal:compes:v:63:y:2021:i:2:d:10.1057_s41294-020-00140-1
    DOI: 10.1057/s41294-020-00140-1
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    1. Bougharriou, Nouha & Benayed, Walid & Gabsi, Foued Badr, 2022. "Democratic transition and fiscal policy in the Arab world," Economic Systems, Elsevier, vol. 46(2).

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