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The National Interest
Bullish on Democracy: Research Notes on Multinationals and the Third Wave
by Minxin Pei and Merritt Lyon
. . . Our evidence, based on examining FDI patterns following democratic regime transitions in 23 countries since the mid-1970s, indicates that FDI investors--mainly MNCs--have been far more socially responsible, even virtuous, than many have supposed. FDI investors have quickly embraced new democracies immediately following a regime transition; overall, the evidence shows a significant increase in FDI within the three years of regime transition compared with the three-year period prior to transition. FDI investors’ confidence in new democracies has played an important role in the consolidation of many democracies since the late 1970s. Unlike international portfolio investors, who can exit a country at the tap of a few computer keys, FDI investors cannot quickly liquidate their investments (mostly factories and equipment). Ironically, the illiquidity of FDI thus becomes a better measure of foreign investors' confidence in the long-term prospects of a given country than portfolio investments. Rising FDI investments in new democracies represent a form of economic endorsement by international investors. Such endorsement seems to carry weight, too; a striking feature of the Third Wave transitions is that no new democracy has been subsequently toppled by an economic crisis. . . .