Democracy in the neighborhood and foreign direct investment

Abstract

The determinants of foreign direct investment (FDI) have been extensively studied. Even though there is extensive research in the area, most of it is based on analyzing the effects of host country characteristics on FDI flows, and yet there is little research on how neighboring country characteristics play a role in facilitating FDI flows to host countries. This paper analyzes the association between the democracy level in neighboring countries and FDI flows to host countries. Using bilateral FDI flows from the OECD countries, with a large host country sample, we find that countries surrounded by democratic countries attract higher FDI flows. Furthermore, we find evidence that countries that are surrounded by neighboring countries with good institutions tend themselves to have better institutions, experience lower civil conflict, and have higher political stability and hence indirectly attract higher FDI flows. Our findings suggest that if neighboring countries act in such way as to become more democratic, FDI flows to these countries would be higher since not only does improving the quality of democracy attract more FDI inflows, but also being surrounded by neighboring advanced democratic countries will also lead to higher FDI flows to them.

Spatial spillovers in trade agreement memberships: Does institutional proximity matter?

“…See, for instance, Dollar and Kraay (2003), Nunn (2007), Costinot (2009), andChor (2010) for further discussions. See, for example, Ferrantino (1993), Maskus and Penubarti (1995), Ma et al (2010), Feenstra et al (2013, and Sheng and Yang (2016) for more discussions on the relevance of economic institutions in trade, and Morrow et al (1998), Wong and Miaojie (2015), and Pinar and Stengos (2021) for the impact of political institutions on trade. Not coincidently, both the aspects of institutions are prominent factors shaping economic growth in the long term (see, e.g., Acemoglu et al, 2005a;Acemoglu & Johnson, 2005).…”

Corruption, democracy and the location decisions of emerging multinationals: evidence from China’s cross-border mergers and acquisitions

“…Empirical findings have not reached a Corruption, democracy and the location decisions consensus either. While many studies report that democracies tend to be more appealing for FDI (Harms and Ursprung, 2002;Jensen, 2003;Busse, 2004;Ahlquist, 2006;Jakobsen and De Soysa, 2006;Jensen, 2008;Kolstad and Villanger, 2008;Choi, 2009;Doces, 2010;Doytch and Eren, 2012;Payton and Woo, 2014;Gossel, 2017;Pinar and Stengos, 2020;Zall e and Ou edraogo, 2021;Carril-Caccia et al, 2022), others have found that FDI is more inclined to invest in countries governed by autocratic regimes (Li and Resnick, 2003;Holmes et al, 2011;Arregle et al, 2013;Gani and Al-Abri, 2013;Mathur and Singh, 2013;Wright and Zhu, 2018). In addition, some studies have identified a non-significant relationship between foreign investment and regime type (Oneal, 1994;Yang, 2007;Ali et al, 2010;Kolstad and Wiig, 2012;Kerner, 2014;Chalmers and Mocker, 2017).…”