The Political Economy of FDI: Does Regime Type Really Matter?

Academic and popular literature suggest that multinational companies are more likely to be attracted to democratic regimes; they are generally seen as more reliable in honoring contracts compared to their undemocratic counterparts. On the flip side, some scholars claim that autocratic governments guarantee lower costs as they can more effectively suppress labor rights and are easier to negotiate with. Despite the existence of evidence for both claims, when all the arguments are considered, it is seen that the most attractive countries for foreign direct investment (FDI) have stable regimes and, hence, are predictable. This article aims to question the proposed relationship between democracy and FDI inflows and argue that the stability of the regime is what matters. Using a sample of developing and least-developed countries from 1970 to 2022, the study demonstrates that a fast-changing political decision-making environment is negatively associated with FDI inflows, while political regime variables do not have any significant impact on developing countries. JEL Classification F21, F50