The effect of political regime on foreign direct investment inflows

Foreign Direct Investment inflows (FDI) have become an attractive means of increasing employment and economic growth in many countires around the world. FDI is particularly important for economic growth and development, as it provides capital, information and technology accumulation, capability, know-how, market access, and employment opportunities for recipient countries. Accordingly, both developed and developing countries a like have been in intense competition to attract more FDI. It is therefore imperative to understand what the determinants of FDI are. A review of the related literature reveals many political and economic determinants of FDI. This study shows the effects of political regime, which is one of the political determinants of FDI, and the effects of political instability on FDI. Main purpose of this study is to identify whether a country has a democratic or autocratic regime would have an effect on FDI inflows. The study also investigates the role of such economic determinants of FDI as GDP growth rate, GDP per capita, foreign trade volume, inflation rate, quality of infrastructure investments, employment rate, and amount of natural resources. For this purpose 48 countries in the middle income category according to World Bank classification are studied by using panel data analysis covering the period between 1998 and 2015. Empirical results from study show that countries with high economic growth rates as well as large markets and abundant natural resources could attract FDI more easily. On the other hand political regimes of the countries and political instability have no effect on FDI.