Political Regime and Vertical vs. Horizontal FDI
Selen Sarisoy Guerin
Centre for European Policy Studies (CEPS)
Luiss University - Department of Economics
Luiss Lab of European Economics Working Paper No. 49
We introduce the effect of the political regime in a model of North-South bilateral foreign direct investment (FDI), and test whether it matters for the nature of FDI inflows to emerging markets. Alternative political regimes in the host country may affect the incentive for foreign investors to implement horizontal rather than vertical FDI, if the political expropriation risk is different for the two kinds of investment. We test the model in a panel of 14 source countries and 24 host countries over 1992-2004, and find that autocracies are likely to receive relatively more FDI of the vertical type, while democracies are more likely to be associated with horizontal FDI inflows.
Number of Pages in PDF File: 29
Keywords: Democracy, Political regime, FDI, Expropriation
JEL Classification: F15, F23, H11, P51
Date posted: July 24, 2007
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