Foreign direct investment, corruption and democracy

Crowded outdoor market during a Hindu religious festival at Orchha Madhya Pradesh India. India received high marks on political corruption by Transparency International, but research shows it doesn't affect the flow of capital into the country.

Article Highlights

  • Foreign investors care about economic freedom more than political when making decisions on where to locate capital

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  • China, Singapore rank low on democracy, but high on property rights and FDI flows

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Foreign direct investment, corruption and democracy

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This article is the first to show that foreign investors care about economic freedoms, rather than political freedoms, in making decisions about where to locate capital. Hence more democratic countries may receive less Foreign Direct Investment (FDI) flows if economic freedoms are not guaranteed. One reason could be that democratizing developing economies are often unable to push through the kind of economic reforms that investors desire due to the presence of competing political interests. This could potentially explain why countries like China and Singapore that rank poorly on the democracy index but are relatively high on the property rights index do well in terms of FDI inflows.

Aparna Mathur is a resident scholar at AEI. Kartikeya Singh works at PricewaterhouseCoopers.

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