Deciding where to invest in the developing world : determinants of FDI flows

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2017-05

Authors

Sierra Castillo, Jose D

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Abstract

The relationship between the type of political regime and foreign direct investments has been widely studied. The large number of studies have explored different elements of the FDI and regime type link, but little consensus has emerged on the overall relationship. In this paper I conduct the first elite level experiment of how political regimes shape investment decisions. By using an original sample of investment analysts from one of the top investment firms in the world I find that the political regime has a significant and substantive effect on investor decisions on whether or not to invest on a foreign country. This finding is robust under varying levels of property rights, capital controls, judicial independence, and economic conditions. I also find that the effect of political regimes is strengthened when the protection of property rights fall. This indicates that regime type plays an instrumental role in investors’ decision making process. The results point towards a need to better understand why political regimes matter to attract investment flows.

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