Local Economic Consequences of Foreign Direct Investment in Democracies and Autocracies

Abstract Governments in developing and emerging countries aim to attract foreign direct investment (FDI) to generate growth. Yet, empirical studies on the country level show no clear growth effect. We argue that FDI induces concentrated benefits on the local level—in close proximity to multinational corporations—which leads to economic development in that area but also amplifies inter-regional economic inequality. Both effects should be stronger in autocracies compared to democracies, because autocrats face fewer political constraints to create profitable investment environments. Empirically, we leverage geo-located data on FDI projects from 2003 to 2018, which we combine with nightlights using two approaches: concentric buffers around project locations and global 10 × 10 km grid cells. Our estimator compares the effect of FDI on growth and inequality between areas that have already received FDI and areas that have not yet received FDI. We find strong evidence for FDI-induced local growth and regional inequality. Both effects are more pronounced in autocracies than democracies.