Abstract
We investigate the effect of the political regime on bilateral FDI flows from advanced to emerging countries in the period 1992–2004. We control for country size, per capita income and privatization proceeds in the host country, and use a random-effect Tobit model to exploit information from zero entries. Our results suggest that democracy does have a positive effect on the amount and probability of FDI flows from developed to emerging countries. Moreover, we find that the effect of democracy on FDI also works through the total factor productivity channel, not only the political risk one as suggested in the literature.
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Notes
See Meyer (1998) for a counter argument.
For a critique of the log–log model, see Silva and Tenreyro (2005).
See, for instance, Head (2003).
The Polity2 index is a composite index of the following underlying variables: competitiveness of executive recruitment, openness of executive recruitment, constraint on the chief executive, regulation of participation and competitiveness of political participation.
For most countries in our sample FDI data for the 1980s are missing although the OECD database starts in 1980.
In this paper, we neglect the natural-resource motivation for FDI. Consequently, fully oil-dependent emerging economies are not represented in our country sample.
We used STATA-Release 9 to perform Tobit regressions. STATA recommends that the results from the model estimated by 12 quadratures (default) points be compared to results from 16 quadrature points. If the relative difference in the estimated coefficients is larger than 1%, then the coefficients are not stable. If this is the case, it may be that the random-effects estimator is the wrong model.
The only exception was the coefficients of the continent dummies. In some specifications, the coefficients for the continent dummies were not robust with regards to quadrature sensitivity as explained above. In those cases, continents dummies are not included in the regression as indicated in the tables. The exclusion of continent dummies did not have an effect on the stability of other variables.
The χ2 test is designed to check whether the random effects from a panel Tobit estimations are significant vis-a-vis pooled Tobit estimations. The statistics for individual country-pair effects are available upon request. The time dummies in our tables are also jointly significant, and the results are available upon request.
The results are available from the authors upon request. The Rho test relies on the correlation between the residuals of these two equations. The results do not justify the use of the Heckman selection model with our data set.
Persson and Tabellini (2006a) find that presidential democracy is more conducive to economic growth. However, we argue that this is not a contradiction with our results for two reasons: first, the effect they suggest is also due to more sound fiscal policies, which might not affect FDI; second, their sample of democratic regimes includes OECD countries as well.
The sum of the coefficient of “per capita GDP” of the host and “per capita GDP interacted with the democracy dummy” is positive and significant. This suggests that democratic host countries tend to receive relatively more “horizontal” FDI.
See Friedrich (1982) for the interpretation of the multiplicative terms in a multiple regression.
Exp(18.35/2.66) = 991.
We have also tested whether these findings are mainly driven by a China-effect, and replicated the regression excluding China. While we still find evidence that democratic countries tend to receive more market-seeking FDI, the coefficients are estimated less precisely, and are significant at the 10% level. However, we have few autocracies in the emerging country sample (one-sixth of the total) and reducing their number could make this exercise less reliable (results available upon request).
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Acknowledgments
We thank an anonymous referee for detailed comments. We also thank Cecilia Frale, Gianmarco Ottaviano, Pietro Reichlin, Daria Taglioni, Giovanna Vallanti and participants in seminars held at LUISS University, the European Central Bank and ECARES for helpful comments. Usual disclaimers apply.
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Appendices
Appendix A
Our data set includes bilateral FDI data for 14 OECD source countries and for 24 emerging host countries over the period 1992–2004 (336 cross-sections by 13 years).
1.1 List of countries in sample
Source countries: Austria, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Portugal, Spain, Sweden, Switzerland, the United Kingdom and the United States.
Host countries (year of permanent democratization according to the POLITY IV data set of the University of Maryland. see: http://www.cidcm.umd.edu/polity/data/): Argentina (1983), Bulgaria (1990), Brazil (1985), Chile (1989), China (–), Colombia (1957), the Czech Republic (established in 1993), Egypt (–), Hungary (1989), Indonesia (1999), India (1950), South Korea (1987), Mexico (1994), Malaysia (1957), Morocco (–), the Philippines (1986), Poland (1989), Russia (1992), Romania (1990), South Africa (1910), Slovakia (established in 1993), Slovenia (1991), Thailand (1992) and Turkey (1983).
Appendix B
2.1 Data definition and sources
Gross FDI inflows: Foreign direct investment inflows from source country to host country in constant 2000 US dollars (OECD International Investment Statistics Yearbook, 2006).
GDP: Gross domestic product in constant 2000 US dollars (World Economic Outlook Database, IMF).
Per capita GDP: Gross domestic product per capita in constant 2000 US dollars (World Economic Outlook, IMF).
GDP per worker: Gross domestic product per worker in constant 2000 US dollars (Penn World Tables http://pwt.econ.upenn.edu).
Privatization proceeds: Privatization proceeds in constant 2000 US dollars (World Bank).
Degree of democratization: Dummy variable denominated Polity2 in the POLITY IV data set by the University of Maryland. Polity2 is a composite index (ranging from −10 to 10) that measures the “intensity” or “degree” of democratization in a country, based on the following underlying variables: competitiveness of executive recruitment, openness of executive recruitment, constraint on the chief executive, regulation of participation and competitiveness of political participation (http://www.cidcm.umd.edu/polity/data).
Democracy dummy: Binary dummy variable taking value one when the political regime is a democracy, zero otherwise. The occurrence of “democracy” is associated with positive values of the Polity2 variable defined above (http://www.cidcm.umd.edu/polity/data).
Political rights: The Freedom House Political Rights index, ranging from 1 (highest degree of freedom) to 7 (lower amount of freedom) (Freedom House 2007).
EU negotiation dummy: Dummy taking value one from the year an emerging country starts EU membership negotiations (and zero for the years before).
Political risk: The risk of non-payment or non-servicing of payment for goods or services, loans, trade-related finance and dividends, and the non-repatriation of capital. Risk analysts give each country a score between 0 and 25: the higher the score, the lower the risk (Eschenbach et al. 2004; http://www.i4ide.org/francois/data.htm).
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Guerin, S.S., Manzocchi, S. Political regime and FDI from advanced to emerging countries. Rev World Econ 145, 75–91 (2009). https://doi.org/10.1007/s10290-009-0004-7
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DOI: https://doi.org/10.1007/s10290-009-0004-7