Democratic transition and foreign direct investment: Transition process matters

This paper provides evidence on the relationship between foreign direct investment (FDI) and democratic transition. We propose first an econometric analysis of the determinants of the democratization process through a "probit" model. We consider a sample of 173 countries, with 44 that have experienced a democratic transition over the period 1980-2010. Our results reveal that variables related to human development and individual freedom facilitate the initiation of the democratic process in contrast to those related to social heterogeneity. In the second part, we study the impact of the democratic transition on FDI inflows. In order to avoid endogeneity, we limit the analysis to countries in transition and similar ones deduced from a matching process carried out after the first part. Our results confirm that democratic transitions lead to a significant increase in FDI inflow