When FDI Flows from Rich to Poor Countries: Does Democracy Matter?

Abstract

We model the effect of democracy on North-South bilateral foreign direct investment (FDI), and test its impact in a panel of 14 source countries and 24 host countries over 1992-2004. As a benchmark, we adopt a setup that combines variables commonly associated with horizontal FDI (economic dimension of the countries; distance) and variables associated with vertical FDI (per capita income as a proxy for capital endowments). Democracy in the host country has a positive effect of North-South FDI flows, especially when we control for privatization programs. As for the type of democracy, a parliamentary regime could have a positive impact on FDI inflows vis-a-vis a presidential one.

Keywords: Foreign direct investment, democracy

JEL Classification: F21, P0