Democracy, Human Capital, and Foreign Direct Investment: Evidence From Developing Economies

Abstract

This paper examines the role of human capital in democracy and foreign direct investment (FDI) relationship in 129 developing countries from 1980 to 2022. Democracy is viewed as a multidimensional concept with five measures: electoral, liberal, egalitarian, participatory, and participation democracy. Employing the dynamic generalized method of moments, the findings demonstrate that democracy indices and human capital have direct, positive, and significant impact on FDI. Additionally, we observe that democracy indices increase FDI inflows when the human capital index is above a certain threshold, while democracy variables decrease FDI inflows below this threshold. The paper also reveals that democracy reduces FDI inflows to low-income economies, sub-Saharan Africa, and Middle East and North Africa countries. However, it increases FDI inflows to middle-income economies and other developing regions. These findings are robust to alternative econometric techniques and model specifications. The findings underscore the importance of enhancing democratization and human capital development to attract FDI to developing economies.