The Political Economy of FDI 605 within a country,but the effect of levels of government consumption is not nearly as strong across countries.The interpretation of this result is that while govern- ments are constrained in their spending,there are other unmeasured compensating factors that allow some countries to have higher levels of government consumption than others.38 Any further analysis of this result is beyond the scope of this article. DEMOCRACY remains positive and statistically significant in all models.This re- sult is especially interesting given that these are fixed-effects regressions,where even when one holds all country attributes fixed,countries that increase their level of democracy will also increase their level of FDI inflows.These results are very similar to the cross-sectional results.Fully democratic governments(scores of 20) attract an added 0.4 percent more FDI flows as a percentage of GDP than fully autocratic countries(scores of 0).Considering that countries over this time period have an average level of FDI flows of 1.3 percent of GDP,democratic political regimes have an enormous effect on FDI inflows. This effect is even larger when one examines the cumulative effects of demo- cratic institutions on FDI.The empirical tests I construct in this article analyze the effects of democratic political institutions on FDI flows.These flows contribute to the stock of foreign capital in the country,where democratic political systems would accumulate a larger capital stock over time than their authoritarian counterparts. The most conservative long-run estimate of the effect of democracy on FDI in- flows (the lowest coefficient on democracy from the first random-effects model) predicts that a democratic country will attract an added 0.61 percent as a percent- age of GDP,which amounts to an increase of over 45 percent of FDI inflows. Using the first fixed-effects model,this estimate jumps to an added 0.98 percent of GDP,or an increase of over 73 percent.39 After ten years of democracy,these states will have an added stock of FDI that amounts to 18 percent of GDP,and 22 percent of GDP,respectively.Using any of these estimates,democratic political institutions have an enormous positive impact on FDI inflows. These empirical results are robust under a number of different model specifica- tions.One potential criticism of these empirical results is that the positive link between democracy and FDI may be driven by the advanced democratic countries in the Organization for Economic Cooperation and Development(OECD).In model (13)I show that these empirical relationships between democracy and FDI are still significant when the OECD countries are dropped from the sample.A second potential objection is that the independent variables MARKET SIZE and DEVELOP- MENT LEVEL may be highly correlated and may be biasing the empirical results.51 58.For a more detailed analysis on the links between government spending and FDI inflows in the OECD,see Jensen 2002. 59.This estimate converges to 0.6 after 7 years of democratic governance.Long-run estimates are generated by the formula for calculating the present value of perpetuity:(democracy coefficient de- mocracy score)/(1-coefficient on the lagged FDI). 60.I thank an anonymous reviewer for a number of suggestions on potential robustness tests. 61.I have also checked the robustness of the empirical results by individually dropping each inde- pendent variable.The results on democracy are unchanged.within a country, but the effect of levels of government consumption is not nearly as strong across countries+ The interpretation of this result is that while govern￾ments are constrained in their spending, there are other unmeasured compensating factors that allow some countries to have higher levels of government consumption than others+ 58 Any further analysis of this result is beyond the scope of this article+ democracy remains positive and statistically significant in all models+ This re￾sult is especially interesting given that these are fixed-effects regressions, where even when one holds all country attributes fixed, countries that increase their level of democracy will also increase their level of FDI inflows+ These results are very similar to the cross-sectional results+ Fully democratic governments ~scores of 20! attract an added 0+4 percent more FDI flows as a percentage of GDP than fully autocratic countries ~scores of 0!+ Considering that countries over this time period have an average level of FDI flows of 1+3 percent of GDP, democratic political regimes have an enormous effect on FDI inflows+ This effect is even larger when one examines the cumulative effects of demo￾cratic institutions on FDI+ The empirical tests I construct in this article analyze the effects of democratic political institutions on FDI flows+ These flows contribute to the stock of foreign capital in the country, where democratic political systems would accumulate a larger capital stock over time than their authoritarian counterparts+ The most conservative long-run estimate of the effect of democracy on FDI in- flows ~the lowest coefficient on democracy from the first random-effects model! predicts that a democratic country will attract an added 0+61 percent as a percent￾age of GDP, which amounts to an increase of over 45 percent of FDI inflows+ Using the first fixed-effects model, this estimate jumps to an added 0+98 percent of GDP, or an increase of over 73 percent+ 59 After ten years of democracy, these states will have an added stock of FDI that amounts to 18 percent of GDP, and 22 percent of GDP, respectively+ Using any of these estimates, democratic political institutions have an enormous positive impact on FDI inflows+ These empirical results are robust under a number of different model specifica￾tions+ 60 One potential criticism of these empirical results is that the positive link between democracy and FDI may be driven by the advanced democratic countries in the Organization for Economic Cooperation and Development ~OECD!+ In model ~13! I show that these empirical relationships between democracy and FDI are still significant when the OECD countries are dropped from the sample+ A second potential objection is that the independent variables market size and develop￾ment level may be highly correlated and may be biasing the empirical results+ 61 58+ For a more detailed analysis on the links between government spending and FDI inflows in the OECD, see Jensen 2002+ 59+ This estimate converges to 0+6 after 7 years of democratic governance+ Long-run estimates are generated by the formula for calculating the present value of perpetuity: ~democracy coefficient * de￾mocracy score!0~1 2 coefficient on the lagged FDI!+ 60+ I thank an anonymous reviewer for a number of suggestions on potential robustness tests+ 61+ I have also checked the robustness of the empirical results by individually dropping each inde￾pendent variable+ The results on democracy are unchanged+ The Political Economy of FDI 605