“Democracy in the neighbourhood and foreign direct investment”

The determinants of foreign direct investment (FDI) have been extensively studied. Even though, there is extensive research on the determinants of FDI flows, most of this research is based on the source and the host countries’ characteristics’ effect on FDI flows, and there is little research on how neighbouring country characteristics play a role in FDI flows to host countries. This paper analyses the association between democracy level in neighbouring countries and FDI flows to host countries. Using bilateral FDI flows from the OECD countries, with a large host-country sample, we examine the association between the democracy level in neighbouring countries and FDI flows with the use of gravity model and generalized method of moments (GMM) estimation techniques. With both estimation techniques, we find that countries surrounded with democratic countries attract higher FDI flows.