Journal
JOURNAL OF COMPARATIVE ECONOMICS
Volume 49, Issue 2, Pages 340-357Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.jce.2020.09.003
Keywords
FDI; Democratic transitions; Institutions; Development; Political risk
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Funding
- People Programme (Marie Curie Actions) of the European Union's Seventh Framework Programme FP7/2007-2013/under REA grant [608129]
- FNRS-FRESH grant
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The study found that the impact of democratic transitions on foreign direct investment depends on whether they are consolidated transitions, and different effects can be observed when political risk is controlled for.
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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