Do Democracies Matter? An Analysis of the Effects of Regime Type and Political Institutions on Foreign Direct Investment using a Dynamic Panel Approach

Abstract

The top twenty host economies from around the world that attract the most amount of Foreign Direct Investment (FDI) lie on a broad spectrum of government systems. From China to India to the US, each have varying degrees of democratization. This study estimates the effect of overall regime type and the impact of specific political institutions like civil liberties, property rights, access to justice and rule of law on net FDI inflows in host economies. Using data for the time period, post the Great Recession, from 2010-2015, for a sample of one hundred and fifty nine countries, I find that regime type has no impact on the amount of FDI, a country receives. I use three econometric models, an OLS regression, a panel fixed effects model and an Arellano and Bond (1991) GMM estimator to evaluate my results. In line with previous studies, I find that investors are more likely to consider specific political institutions especially access to justice and property rights when making investment decisions. This suggests that investors care more about (1) investment safety and (2) political risk when making decisions of where to invest.