Abstract

In this study, we theoretically refine and empirically test the presumed links between the level of democracy in a country and the amount of foreign direct investment (FDI) it receives in the global economy. We argue that both consolidated democracies and authoritarian regimes have institutional advantages for investors and that both are relatively more successful in attracting FDI. Hybrid regimes, on the other hand, with limited amount of executive constraints and nascent political institutions have a harder time attracting FDI. We test our theory on 99 non-OECD countries between the years 1970-2000. The results confirm our hypotheses and demonstrate that the link between democracy and FDI is U-shaped. Further democratization does not always enhance a country’s ability to attract FDI.