Effective Democracy, Economic Growth and Attractiveness to Foreign Investment
34 Pages Posted: 26 May 2020 Last revised: 13 Dec 2021
Date Written: April 20, 2020
Abstract
Are internationalization decisions of MNEs affected by democracy levels of the host country? Democracy is an over-arching construct that defines the formal and informal institutions present in a country and democratic nations are more credible, stable, participative, accountable and better governed. Democratization should therefore, make locations more favourable for MNEs while also helping reduce their liability of foreignness. Yet very little is known about the role of democracy. Using a unique sample of FDI and cross-border M&As, our paper for the first time provides global evidence of how effective democratization increases attractiveness of the target county to foreign investment. We find a positive linear association of effective democracy with FDI and cross-border M&A inflows. Our analysis differentiates between a paper (only rules) and effective (rules with implementation) democracy and identifies implementation as a critical factor in democratization’s attractiveness. In doing so, this paper provides a key peg in the MNE location choice decision and has implications for firms and their stakeholders, M&A decision-makers, business leaders, and policy makers.
Keywords: Internationalization; Democracy; Foreign Investment; Implementation; Institutions
JEL Classification: O11, O16, F34, F23
Suggested Citation: Suggested Citation