When FDI Flows from Rich to Poor Countries: Do democracy and economic reform matter? CEPS Working Document, No. 251, 12 October 2006

Sarisoy Guerin, Selen, and Manzocchi, Stefano. (2006) When FDI Flows from Rich to Poor Countries: Do democracy and economic reform matter? CEPS Working Document, No. 251, 12 October 2006. [Working Paper]

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Abstract

Foreign direct investment (FDI) is an instrument of international capital flow and it also shares some features of international trade flows as it is often associated with intra-firm trade by multinational corporations. Combining features from both ‘growth-type’ and ‘gravity-type’ models, we argue that democracy and economic reform in emerging economies have a joint positive impact on FDI inflows from advanced countries. This effect of democracy and economic reform is robust even when the EU membership negotiations are taken into account. We conclude that the role of democracy and market-oriented reform is robust and widespread beyond European borders. On the other hand, our results can be interpreted as evidence that prospects of joining the EU acts as an anchor for the host country.

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