Effective Democracy, Economic Growth and Attractiveness to Foreign Investment

34 Pages Posted: 26 May 2020 Last revised: 13 Dec 2021

See all articles by Debarati Basu

Debarati Basu

Shiv Nadar University, School of Management and Entrepreneurship

Shabana Mitra

Shiv Nadar University

Archana Purohit

affiliation not provided to SSRN

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

Basu, Debarati and Mitra, Shabana and Purohit, Archana, Effective Democracy, Economic Growth and Attractiveness to Foreign Investment (April 20, 2020). Available at SSRN: https://ssrn.com/abstract=3586268 or http://dx.doi.org/10.2139/ssrn.3586268

Debarati Basu (Contact Author)

Shiv Nadar University, School of Management and Entrepreneurship ( email )

NH 91, Tehsil Dadri
Greater Noida
Delhi-NCR, 201314
India

HOME PAGE: http://https://sites.google.com/view/debaratibasu/home

Shabana Mitra

Shiv Nadar University ( email )

NH-91, Tehsil Dadri
GAUTAM BUDDHA NAGAR, 201313
India

Archana Purohit

affiliation not provided to SSRN

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