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Democratic transitions can attract foreign direct investment: Effect, trajectories, and the role of political risk

Author

Listed:
  • Jean Lacroix

    (RITM - Réseaux Innovation Territoires et Mondialisation - Université Paris-Saclay)

  • Pierre-Guillaume Méon

    (Centre d'Etudes Economiques et Sociales de l'Environnement-Centre Emile Bernheim - ULB - Université libre de Bruxelles)

  • Khalid Sekkat

    (Economics - ULB - Université libre de Bruxelles)

Abstract

Using a difference-in-differences method on a panel of 115 developing countries from 1970 to 2014, we find that democratic transitions do not affect foreign direct investment (FDI) inflows, on average. However, consolidated democratic transitions, i.e. transitions that do not go into reverse for at least five years, increase FDI inflows, with the bulk of the improvement appearing 10 years after the transition. Furthermore, when controlling for political risk, the effect of consolidated democratic transitions appears immediately after they have occurred, suggesting that higher political risk in the early years of the new regime offsets their positive intrinsic effect on FDI.
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Suggested Citation

  • Jean Lacroix & Pierre-Guillaume Méon & Khalid Sekkat, 2021. "Democratic transitions can attract foreign direct investment: Effect, trajectories, and the role of political risk," Post-Print hal-04210351, HAL.
    • Handle: RePEc:hal:journl:hal-04210351
    DOI: 10.1016/j.jce.2020.09.003
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    2. Sargis Karavardanyan, 2022. "Short-Term Harm, Long-Term Prosperity? Democracy, Corruption and Foreign Direct Investments in Sino-African Economic Relations," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(3), pages 417-486, September.
    3. Cheche Duan & Yicheng Zhou & Dehong Shen & Shengqiao Lin & Wei Gong & József Popp & Judit Oláh, 2021. "The Misunderstanding of China’s Investment, and a Clarification: “Faustian Bargain” or “Good Bargain”? On the OFDI Data of Central and Eastern Europe," Sustainability, MDPI, vol. 13(18), pages 1-25, September.

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