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Under Which Condition Does the Democratization of the Arab World Improve FDI?

Nouha Bougharriou (), Walid Benayed and Foued Badr Gabsi ()
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Nouha Bougharriou: University of Sfax
Foued Badr Gabsi: Faculty of Economics and Management of Sfax

Comparative Economic Studies, 2021, vol. 63, issue 2, No 3, 224-248

Abstract: Abstract This paper examines the relationship between democracy and foreign direct investment (FDI) in the Arab World over the period 2002–2013. The results show strong evidence of an inverted U-shaped relationship between democracy and FDI. This means that democratization should only be FDI-fostering if a country is not sufficiently democratic. In an attempt to explain these findings, we show that the asymmetric effects of democracy on FDI stem from the U-shaped democracy–taxation path. That is, at earlier stages of democratization, democracy is associated with lower taxation levels, which promotes FDI. However, when a certain level of democracy is reached, a deeper democratization would increase taxation, which hampers FDI. Hence, a moderate improvement in political and civil freedoms seems to be a key prerequisite to attract more FDI in authoritarian Arab countries.

Keywords: Democracy; FDI; Taxation; Nonlinearities; Arab World; H20; F23; P16 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1057/s41294-020-00140-1

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