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Democratic transitions can attract foreign direct investment: Effect, trajectories, and the role of political risk

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  • Lacroix, Jean
  • Méon, Pierre-Guillaume
  • Sekkat, Khalid
Abstract
Using a difference-in-differences method on a panel of 115 developing countries from 1970 to 2014, we find that democratic transitions do not affect foreign direct investment (FDI) inflows, on average. However, consolidated democratic transitions, i.e. transitions that do not go into reverse for at least five years, increase FDI inflows, with the bulk of the improvement appearing 10 years after the transition. Furthermore, when controlling for political risk, the effect of consolidated democratic transitions appears immediately after they have occurred, suggesting that higher political risk in the early years of the new regime offsets their positive intrinsic effect on FDI.

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  • Lacroix, Jean & Méon, Pierre-Guillaume & Sekkat, Khalid, 2021. "Democratic transitions can attract foreign direct investment: Effect, trajectories, and the role of political risk," Journal of Comparative Economics, Elsevier, vol. 49(2), pages 340-357.
    • Handle: RePEc:eee:jcecon:v:49:y:2021:i:2:p:340-357
    DOI: 10.1016/j.jce.2020.09.003
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    2. Sami Ullah & Kishwar Ali & Muhammad Ehsan, 2022. "Foreign direct investment and economic growth nexus in the presence of domestic institutions: a regional comparative analysis," Asia-Pacific Journal of Regional Science, Springer, vol. 6(2), pages 735-758, June.
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