Democracy and FDI

31 Pages Posted: 15 Jul 2003

Date Written: 2003


Many believe that multinational enterprises insensitively ignore political rights and civil liberties in the countries of their investments. Frequently, non-governmental organizations accuse multinationals of fostering repressive regimes in developing countries and consider foreign direct investment (FDI) as a tool of exploitation. This paper tries to examine empirically the complex relationship between democracy and FDI in a systematic way, using cross-sectional and panel data analysis. The results indicate that - on average - investments by multinationals are significantly higher in democratic countries, thereby refuting the hypothesis that political repression fosters FDI. Yet this positive link does not hold for the 1970s, when a considerable share of FDI flowed to countries with repressive regimes.

Keywords: FDI, Democracy, Political Rights, Civil Liberties

JEL Classification: C31, C33, F21, F23

Suggested Citation

Busse, Matthias, Democracy and FDI (2003). Available at SSRN: or

Matthias Busse (Contact Author)

Ruhr-University Bochum ( email )

Faculty of Management and Economics, GC 3/145
D-44780 Bochum, DE 44780

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