Democracy in the neighborhood and Foreign Direct Investment

Mardi | 2019-06-27
Salle des thèses 10h30 – 12h00

Mehmet PINAR – Thanasis STENGOS

The determinants of foreign direct investment (FDI) have been extensively studied. Even though, there is extensive research on the determinants of FDI flows, most of this research is based on the effects of host country characteristics on FDI flows, and there is little research on how neighboring country characteristics play a role in FDI flows to host countries. This paper analyzes the association between democracy level in neighboring countries and FDI flows to host countries. Using bilateral FDI flows from the OECD countries, with a large host-country sample, we find that countries surrounded with democratic countries attract higher FDI flows. Furthermore, we find evidence that the countries that are surrounded by good institutions tend to have better institutions, experience lower civil conflict and have higher political stability suggesting that being surrounded by better democracies have indirect role in attracting higher FDI flows to host countries. Our findings suggest that if neighboring countries act together to become more democratic, FDI flows to these countries would be much higher since not only improving the quality of democracy attracts more FDI inflows but also being surrounded by neighboring advanced democratic countries will also lead to higher FDI flows to these countries.