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Democracy and FDI

Matthias Busse

No 220, HWWA Discussion Papers from Hamburg Institute of International Economics (HWWA)

Abstract: Many believe that multinational enterprises insensitively ignore political rights and civil liberties in the countries of their investments. Frequently, non-governmental organisations 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 (search for similar items in EconPapers)
JEL-codes: F21 F23 C31 C33 (search for similar items in EconPapers)
Date: 2003
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