The Influence of Democratic Electoral Processes on Inflows of Foreign Direct Investment

Abstract

This paper examines the influence of democratic politics on a critical component of modern economies: inflows of foreign direct investment (FDI). Scholars suggest that the principals of corporations prefer to invest in companies in democracies than within authoritarian regimes; however, variance does occur across democracies. I pose a simple question: what is it about democracy that influences inflows of foreign direct investment? I explore the argument that the ebb and flow of domestic politics (in the form of national level elections and government formations) may play a role. Using time series data from democracies around the world, I find that while the timing of a legislative or presidential election does not appear to directly influence inflows of foreign direct investment, their outcomes may: lengthy government formations may be associated with greater increases in FDI, as are left and centrist prime ministers. Finally, politically polarized legislatures seem to discourage investors. (F21, F41, F37)