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Democratic Institutions and FDI Inflows to the Developing Countries

Research Question of the Article: The research outlines theory that assists in identifying casual avenues with potential of hindering, and promoting FDI inflows through democratic institutions. The research explores gape in the existing literature is the study of ‘democratic’ effects’ on FDI as a broad subject-matter. The paper utilizes quantitative method techniques for the negative and positive effects, which includes empirical tests relating to 53 developing countries, and the time frame of the data set is 1882 and 1995 (Li and Resnick, 2003, pp. 178). The research findings suggest that the relationship of democracy-related property rights protection, and general property-rights protection, with FDI inflows is positive. The encouraging effect of property rights is due to the democratic institutions effect, that is, in the form of private property rights protection. Democracy allows free market with least government intervention, which means assured protected property rights. Although, “after controlling for the positive effect of democracy via property rights protection, democratic institutions reduce FDI inflows” (Li and Resnick, 2003, p. 183). Authors illustrate the theorizing part in the first section, followed with discussion on research design, results, and empirical analysis.

Main Arguments and Theories: Li and Resnick (2003, pp. 175) argue that in the world where seventy percent of the world trade is governed through multinational enterprises (MNEs), which results in higher growth rate for Foreign Direct Investment (FDI) when compared with word income growth rate since the 1960s. On the contrary, diffusion of ‘democratic governance’ and ‘FDI inflows’ to developing countries did not result in a linear impact, and growth. As the number of democracies rose to 73 (1995) from 31 (1975), the significance of theorizing effects of democratic institutions on FDI for policy purposes also increased. The research also elaborates on the ‘way forward,’ which explains the relationship between political democracy and economic globalization (Li and Resnick, 2003, p. 176). Henceforth, the three avenues reduces degree of freedom for MNEs, because of the policymaking process initiated with democratic institutions. Theory also explains the promotional effect of democratic institutions vis-à-vis FDI inflows due to strong protection of property rights through means of legislation and practice.

The theoretical synthesis and extension of the knowledge in the research relies upon the concept of ‘firm logic’ for investing abroad; and, the hindering effects of the democratic institutions on FDI has three-fold avenues. First, the MNEs has monopolistic and oligopolistic roles, which actually reduces with the introduction of democratic constraints. Secondly, the generous fiscal and financial incentives for supporting foreign investors, offered by host governments, actually decreases as the consequence of democratic constraints. Third, wider political participation increases the ability of indigenous businesses to gain property rights protection offered through institutionalized avenues. The logic of ‘preventing state from predatory rent seeking’ works well in the context of three-fold avenues discussed above, when the common interests of citizens are part of the legislature process (Li and Resnick, 2003, p. 185).

Closing Thoughts: The theoretical basis of the research relies on the conflictive narratives of Olson (1993) and O’Donnel (1978). Olson (1993) argues that higher democracies tend to have institutions and systems in place that guarantee property rights, which is cornerstone to attracting FDI in the case of developing countries. On the contrary, O’Donnel argues that the relationship between autocracy and investors is positive, and autocrats play the role of gate-keepers for keeping labor protection and taxation in the friendly zones. Henceforth, author of the study explains the contrasting nature of Olson and O’ Donnell’s narratives for the relationship of FDI and democracy. Although, authors argue that the autocrats also play a protective role, rather than participation in banditry. However, the effect of multinational capital is in the form of alliance between the state and the local, within the autocratic regimes.

Discussion Question: How democratic institutions in developing countries can manage to secure FDI inflow from developed world? Does democratic institutions in developing countries can only attract FDI inflow through strengthening private property rights?

Works Cited

Li, Quan, and Adam Resnick. “Reversal of fortunes: Democratic institutions and foreign direct investment inflows to developing countries.” International organization 57.1 (2003): 175-212.

O’donnell, Guillermo. “Reflections on the patterns of change in the bureaucratic-authoritarian state.” Latin American Research Review 13.1 (1978): 3-38.

Olson, Mancur. “Dictatorship, democracy, and development.” American political science review (1993): 567-576.



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