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Foreign Direct Investment and Civil Rights: Testing Decreasing Returns to Civil Rights
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In this paper, the effectiveness of improvements in political and civil rights for attracting foreign direct investment flows (FDI) into democracies is examined. The author contends that advances in the quality of democracy – specifically those concerning civil rights – present positive but decreasing marginal returns in attracting FDI inflows. This is empirically proven by using panel data regressions within the Latin American and Eastern European contexts from periods following their democratization (1991-2003).
Due to the evidence of decreasing returns to civil rights, the article concludes that 1) countries that boost the scope of civil rights after democratizing (despite its diminishing but positive returns) are relatively more successful in attracting FDI inflows than those with extreme levels; 2) politicians and policy-makers should expand the provision of civil rights selectively if the maximum impact in terms of foreign investment (and eventually more economic development through foreign direct investment) becomes a priority; and 3) despite the existence of diminishing returns, the impact of any increase in the scope of civil rights is almost always positive on the amount of FDI inflows.