Institutional quality and US FDI outflows: Do political regimes matter?

Abstract

To what extent are the locational decisions for US FDI outflows affected by the nature of the political regimes along with the quality of institutions in the host countries? Using property rights protection as an indicator of institutional quality, this study analyses how sensitive US FDI outflows are to institutional factors and to the nature of the hosting countries’ political regimes. In other words, whether a democratic or an autocratic regime makes any difference in terms of attracting US FDI. A joint effect between democracy and the protection of property rights on US FDI flows is examined using a panel data fixed effect technique for forty-one countries during the period 1984–2021. The instrumental variable method is used to check the endogeneity concerns. The results predict that the protection of property rights can have a positive impact in attracting US FDI, provided the countries in question become more democratic in nature. The findings suggest that partial reform to enhance the institutional quality or unconsolidated democratization are insufficient to attract US FDI rather than complementing each other in bringing FDI. The implication of the findings reveals that a democratic country such as India can be a good location for US investment if its protection of property rights becomes stronger. Moreover, some highly democratic countries with strong institutions should be more market oriented and improve their quality of infrastructure to receive the maximum benefit. Our results are robust to alternate measures of institutional quality/democracy and endogeneity concerns.