Effective Democracy, Economic Growth and Attractiveness to Foreign Investment

Abstract

Democratization should make locations more favourable for MNEs internationalizing. Yet the association of democracy with economic growth and foreign investment remains inconclusive. Contrary to and in response to literature, we show that dichotomous and rules-based democracy measures have a U-shaped relation with GDP and FDI. We thus, create a novel index of effective democracy that is continuous and uses rules weighted by implementation. We then show a clear positive linear association of effective democracy with both GDP and FDI. This provides policy stakeholders a more robust way forward in understanding democratization. It also explains the MNE location choice decision better.