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

• Published in: Journal of Comparative Economics Vol. 49; no. 2; pp. 340 - 357
• Main Authors: Lacroix, Jean, Méon, Pierre-Guillaume, Sekkat, Khalid
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.06.2021; Elsevier
• Subjects: Democratic transitions; Development; Economics and Finance; FDI; Humanities and Social Sciences; Institutions; Political risk; Development; Political risk; FDI; Democratic transitions; Institutions
• ISSN: 0147-5967; 1095-7227
• DOI: 10.1016/j.jce.2020.09.003

•Democratic transitions do not affect foreign direct investment inflows on average.•Consolidated democratic transitions increase foreign direct investment inflows.•Foreign investment increases 10 years after a consolidated democratic transition.•Net of political risk, consolidated democratic transitions attract foreign investment more rapidly.•Political risk after democratic transitions may offset their positive effects. 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.