The Effect of Democracy, Economic Stability and Political Stability on Foreign Direct Investment Evidence from 138 World’s Countries

Bakhtiar Molaie¹, Azad Ahmadi²
(1. Islamic Azad University Central Tehran Branch, Tehran, Iran; 2. Baneh Payame Noor University, Baneh, Iran)

Abstract: According to economic theories, investment is one of the most effective factors for economic growth. There are many ways for capital absorption that foreign direct investment is one of most effective ways; because foreign direct investment influx in addition to capital absorption leads to technology transmission, arrival of expert human capital, management and knowledge. Therefore, it is necessary to identify influential agents on FDI for stable and sustainable economic growth, scientifically. In recent decades, democracy has been emphasized more than ever. Foreign direct investment and democracy process are significant from many viewpoints. Thereupon, the purpose of this study is the comparative investigation of relation between democracy and foreign direct investment in three groups of countries including 36 developed, 68 developing and 34 least developed countries between the second half of 1995-2010 decade by panel data method. Hypothesis of this study is from statistical viewpoint, that, there is a meaningful difference between the effect of democracy on foreign direct investment in developed, developing and least developed countries. Obtained results show that democracy influence on foreign direct investment is positive and meaningful, negative and meaningful and meaningless in developed, developing and least developed countries, respectively. In addition, the effect of economic growth, economic stability, and political stability and inflation agents in three mentioned groups of countries on foreign direct investment have been investigated as other independent variables.

Key words: foreign direct investment (FDI); democracy; political stability; economic stability; 138 world’s countries

JEL codes: E22, F21