The dual political effect of foreign direct investment in developing countries

This study revisits the political effect of Foreign Direct Investment (FDI) on the level of democracy in developing countries. The author finds that FDI has dual political effects based on the panel corrected standard error (PCSE) analysis using panel data covering 124 developing countries from 1970 to 2005. Although the political effect of aggregate FDI is negative, FDI from developed democracies exerts a significant positive effect on democracy. FDI in the primary sector plays a negative role in the political development in developing countries. The author also finds a regional difference in the political effect of FDI due to uneven distribution of disaggregated FDI.