The Relationship between Democracy and Foreign Direct Investment in East Asia

Abstract

Has progress toward democracy affected the level of foreign direct investment (FDI) inflows to East Asia? Existing research presents conflicting theoretical perspectives on the effect of democratic institutions on FDI. One thread suggests that democratization will lead to more FDI inflows; a second argues for less; and a third argues there may be no effect. We explore whether political institutions impact FDI flows to East Asia by empirically assessing the relationship between the two phenomena. Using three-stage least-squares estimation to account for endogeneity and pooled annual time-series data from 1975 to 2018 for 13 East Asian countries, we find that democratic institutions are associated with higher levels of inward FDI. The results are robust across alternative measures of FDI and democracy. We conclude with a discussion of policy implications.