Asiedu and Lien (2011) investigates on the relationship between a country's democracy level and the government's ability to attract foreign direct investment. Since many of the countries that want to attract FDI also have weak democracies or nondemocratic governments, uncovering the intrinsic relationship becomes important. Theoretically, the positive effect is through property rights protection. A democratic government tend to offer more friendly policies regarding property issue. The negative pathway considers the oligopolistic or monopolistic positions, which might be more easily obtained by Multinational Enterprises (MNEs) when operating in autocratic countries. The main contribution of Asiedu and Lien (2011) is using natural resource as an interpretation for the controversy of results presented in the former literature.
The data utilized in this paper is a panel dataset covering 112 developing countries over the period 1982–2007. Especially, the authors employ three measures of democracy from three different sources and take advantage of both dynamic panel “difference” GMM and the “system” GMM method to do the estimation. The control variables include trade level, inflation rate, infrastructure construction level, domestic income level and natural resources. The measurement of natural resources is the share of fuel and minerals in total merchandise exports. The results show that democracy promotes FDI if and only if the value of the share of minerals and fuel in total exports is less than some critical value. However, the authors are still not able to find a convincing way to solve the endogeneity problem inherited in the relationship.
In my research design of this topic, firstly, I will take advantage of the mortality rates expected by the first European settlers in the colonies as an instrument for current democracy level. The strategy was proposed in Acemoglu, Johnson, and Robinson (2001) and data could also be found in the paper. Basically, the dataset will be cross-sectional with roughly 100 countries. All of the control variables data would come from World Bank Development Indicators. A Two-Stage Least Squares (2SLS) regression method will be employed to capture the effect of democracy on current FDI and this should be a better way to deal with endogeneity issue here.
With this baseline empirical model, I should be able to estimate the parameters and discover some stylized facts with respect to democracy and FDI. Based on these facts, I will alter some assumptions and build a multicountry general equilibrium model to further investigate on the relationship. Since the micro foundation of democracy's influence on trade or FDI has never been discussed in the literature, I will try to include both a search friction and a repeated game with contracting issue in the model. The model will be calibrated with some macro data. Democracy level could be seen as an exogenous shock. In that case, I will be able to do counterfactuals with the model and assess the influence of democracy on overall wage level, trade participation of the firms. I could also detect the transmission mechanism behind one country's democracy level and FDI.
References
Acemoglu, Daron, Johnson, Simon, Robinson, James A, 2001. The Colonial Origins of Comparative Development: An Empirical Investigation. The American Economic Review 91 (5), 1369-401.
Asiedu, Elizabeth, Lien, Donald, 2011. Democracy, foreign direct investment and natural resources. Journal of international economics 84 (1), 99-111.
Asiedu and Lien (2011) investigates on the relationship between a country's democracy level and the government's ability to attract foreign direct investment. Since many of the countries that want to attract FDI also have weak democracies or nondemocratic governments, uncovering the intrinsic relationship becomes important. Theoretically, the positive effect is through property rights protection. A democratic government tend to offer more friendly policies regarding property issue. The negative pathway considers the oligopolistic or monopolistic positions, which might be more easily obtained by Multinational Enterprises (MNEs) when operating in autocratic countries. The main contribution of Asiedu and Lien (2011) is using natural resource as an interpretation for the controversy of results presented in the former literature.
The data utilized in this paper is a panel dataset covering 112 developing countries over the period 1982–2007. Especially, the authors employ three measures of democracy from three different sources and take advantage of both dynamic panel “difference” GMM and the “system” GMM method to do the estimation. The control variables include trade level, inflation rate, infrastructure construction level, domestic income level and natural resources. The measurement of natural resources is the share of fuel and minerals in total merchandise exports. The results show that democracy promotes FDI if and only if the value of the share of minerals and fuel in total exports is less than some critical value. However, the authors are still not able to find a convincing way to solve the endogeneity problem inherited in the relationship.
In my research design of this topic, firstly, I will take advantage of the mortality rates expected by the first European settlers in the colonies as an instrument for current democracy level. The strategy was proposed in Acemoglu, Johnson, and Robinson (2001) and data could also be found in the paper. Basically, the dataset will be cross-sectional with roughly 100 countries. All of the control variables data would come from World Bank Development Indicators. A Two-Stage Least Squares (2SLS) regression method will be employed to capture the effect of democracy on current FDI and this should be a better way to deal with endogeneity issue here.
With this baseline empirical model, I should be able to estimate the parameters and discover some stylized facts with respect to democracy and FDI. Based on these facts, I will alter some assumptions and build a multicountry general equilibrium model to further investigate on the relationship. Since the micro foundation of democracy's influence on trade or FDI has never been discussed in the literature, I will try to include both a search friction and a repeated game with contracting issue in the model. The model will be calibrated with some macro data. Democracy level could be seen as an exogenous shock. In that case, I will be able to do counterfactuals with the model and assess the influence of democracy on overall wage level, trade participation of the firms. I could also detect the transmission mechanism behind one country's democracy level and FDI.
References Acemoglu, Daron, Johnson, Simon, Robinson, James A, 2001. The Colonial Origins of Comparative Development: An Empirical Investigation. The American Economic Review 91 (5), 1369-401. Asiedu, Elizabeth, Lien, Donald, 2011. Democracy, foreign direct investment and natural resources. Journal of international economics 84 (1), 99-111.