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Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment

  • Jensen, Nathan M.

Foreign direct investment (FDI) is an important element of the global economy and a central component of economic development strategies of both developed and developing countries. Numerous scholars theorize that the economic benefits of attracting multinational corporations come at tremendous political costs, arguing that democratic political systems attract lower levels of international investment than their authoritarian counterparts. Using both cross-sectional and time-series cross-sectional tests of the determinants of FDI for more than 100 countries, I generate results that are inconsistent with these dire predictions. Democratic political systems attract higher levels of FDI inflows both across countries and within countries over time. Democratic countries are predicted to attract as much as 70 percent more FDI than their authoritarian counterparts. In a final empirical test, I examine how democratic institutions affect country credibility by empirically analyzing the link between democracy and sovereign debt risk for about eighty countries from 1980 to 1998. These empirical tests challenge the conventional wisdom on the preferences of multinationals for authoritarian regimes.Special thanks to Geoffrey Garrett for his extensive comments on this project and a number of other related projects on the determinants of foreign direct investment. I would also like to thank Nancy Brune, Jose Cheibub, Lilach Gilady, Witold Henisz, Charles Martin, Fiona McGillivray, Bruce Russett, Andy Sobel, Jason Sorens, Thomas K nig, Leonard Wantchekon, James Vreeland, the editors of IO, and three anonymous reviewers for helpful comments and suggestions. Thanks to Nancy Brune for making her capital account liberalization data available.

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Article provided by Cambridge University Press in its journal International Organization.

Volume (Year): 57 (2003)
Issue (Month): 03 (June)
Pages: 587-616

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Handle: RePEc:cup:intorg:v:57:y:2003:i:03:p:587-616_57
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