Investors, turbulence, and transition: Democratic transition and foreign direct investment in nineteen developing countries

Abstract

Do profit‐seeking foreign direct investors value a country's transition to democracy? If they do, they should vote with their pocketbooks, resulting in a post‐transition increase in foreign direct investment flows. This study attempts to uncover links between transition to democracy and foreign direct investment (FDI) in Asia, Latin America, and the Caribbean, In doing so, it addresses existing arguments about connections between democracy and investor behavior. The regions examined have not only experienced democratic transitions, they also account for the majority of the increasing flow of FDI to the developing world. This research employs time‐series cross‐sectional (TSCS) economic and political data, using ordinary least squares with panel corrected standard errors. The central finding is that transition to democracy has a negative effect on FDI. Secondarily, political instability and higher levels of democracy also deter foreign direct investors.

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