Democratic Accountability and the Relative Obstacles to Foreign Investment

Fergal McCann, Michael Dorsch and Eoin McGuirk

No 56, Proceedings of the German Development Economics Conference, Berlin 2011 from Verein für Socialpolitik, Research Committee Development Economics

Abstract: This paper considers the relationship between democratic accountability in de- veloping countries and the policies they use to attract foreign direct investment (FDI). We isolate two policy areas that governments of developing countries use to attract FDI: the tax burden on firms and the regulatory standards within which they operate. Countries that maintain high business taxes can only attract FDI by offering a less regulated business environment, which may have associated po- litical costs. The extent to which democratic accountability constrains leaders in their tax/regulatory policy choices is our main line of analysis. The novelty of the paper is that it endogenously determines policy choices within a political economy framework that recognizes the trade-offs between attracting FDI and maintaining political control. Examination of firm-level survey data from foreign firms operating in eastern Europe and central Asian economies confirms our model's main conclusion: regulation is seen to be a relatively larger obstacle to doing business in countries with greater democratic accountability.

Date: 2011
New Economics Papers: this item is included in nep-cwa, nep-pol and nep-reg
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Citations: View citations in EconPapers (2)

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