12 Oct 2006

When FDI Flows from Rich to Poor Countries: Do democracy and economic reform matter?

Selen Sarisoy Guerin / Stefano Manzocchi

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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, the authors of this paper argue that democracy and economic reform in emerging economies have a joint positive impact on FDI inflows from advanced countries. They conclude that the role of democracy and market-oriented reform is robust and widespread beyond European borders. On the other hand, their results can also be interpreted as evidence that the prospect of joining the EU acts as an anchor for the host country.