596 International Organization between Brazilian presidential candidate Luiz Inacio da Silva and the Brazilian stock and bond markets is just one of many illustrative examples.After the an- nouncement that da Silva and his left-wing Workers'Party had overtaken Presi- dent Cardoso for the lead in the 2002 presidential elections,stock and bond markets tumbled.Cardoso stressed that voting da Silva into power would ruin Brazil's im- age in the eyes of the international financial community.To calm international markets,da Silva made pledges to the international community on his future pol- icies,making assurances that his policies would be market-friendly.This is just one of many examples of the effects of international capital markets both on do- mestic politics and on individual politicians'electoral fortunes.The big question is if elections,or democratic institutions generally,constrain political leaders. This complex relationship,given the potential costs and benefits of democratic institutions to multinationals,calls for a serious empirical study to discover the aggregate relationship between political regimes and domestic governments.Un- fortunately,few empirical studies have examined the relationship between demo- cratic political institutions and FDI flows.The empirical work that directly explores this issue,while thin,finds either that FDI flows are not responsive to political regimes or that democratic political institutions are associated with lower levels of FDI inflows.32 These studies suffer from serious empirical flaws that I examine more closely in the empirical section of this article. The next section of this article first examines if there is a general positive rela- tionship between democratic governments and higher levels of FDI inflows.The seventh section comes back to the issue of credibility and examines the effects of democratic institutions on country sovereign debt ratings.My empirical results show that democratic systems are associated with higher country credit ratings. Empirical Tests-Overview In this article I explore the relationship between FDI and democracy in four sets of empirical tests.The first set of tests estimates the effects of democratic institu- tions on FDI inflows in a cross-section of countries in the 1990s.These tests ex- amine the general relationship and the robustness of the findings on the effects of democracy on FDI inflows.The second set tests the relationship by using a time- series cross-sectional analysis of more than 100 countries for almost thirty years.33 The third set of empirical tests employs a Heckman selection model to further examine the robustness of the relationship.The final set examines the causal mech- anism linking democracy and FDI by examining the effects of democratic institu- 32.See Oneal 1994;Alesina and Dollar 1998;and Jessup 1999. 33.For presentational reasons I only include the fixed-effects results.All results are the same in both the random and fixed-effects regressions unless noted.between Brazilian presidential candidate Luiz Inácio da Silva and the Brazilian stock and bond markets is just one of many illustrative examples+ After the an￾nouncement that da Silva and his left-wing Workers’ Party had overtaken Presi￾dent Cardoso for the lead in the 2002 presidential elections, stock and bond markets tumbled+ Cardoso stressed that voting da Silva into power would ruin Brazil’s im￾age in the eyes of the international financial community+ To calm international markets, da Silva made pledges to the international community on his future pol￾icies, making assurances that his policies would be market-friendly+ This is just one of many examples of the effects of international capital markets both on do￾mestic politics and on individual politicians’ electoral fortunes+ The big question is if elections, or democratic institutions generally, constrain political leaders+ This complex relationship, given the potential costs and benefits of democratic institutions to multinationals, calls for a serious empirical study to discover the aggregate relationship between political regimes and domestic governments+ Un￾fortunately, few empirical studies have examined the relationship between demo￾cratic political institutions and FDI flows+ The empirical work that directly explores this issue, while thin, finds either that FDI flows are not responsive to political regimes or that democratic political institutions are associated with lower levels of FDI inflows+ 32 These studies suffer from serious empirical flaws that I examine more closely in the empirical section of this article+ The next section of this article first examines if there is a general positive rela￾tionship between democratic governments and higher levels of FDI inflows+ The seventh section comes back to the issue of credibility and examines the effects of democratic institutions on country sovereign debt ratings+ My empirical results show that democratic systems are associated with higher country credit ratings+ Empirical Tests—Overview In this article I explore the relationship between FDI and democracy in four sets of empirical tests+ The first set of tests estimates the effects of democratic institu￾tions on FDI inflows in a cross-section of countries in the 1990s+ These tests ex￾amine the general relationship and the robustness of the findings on the effects of democracy on FDI inflows+ The second set tests the relationship by using a time￾series cross-sectional analysis of more than 100 countries for almost thirty years+ 33 The third set of empirical tests employs a Heckman selection model to further examine the robustness of the relationship+ The final set examines the causal mech￾anism linking democracy and FDI by examining the effects of democratic institu- 32+ See Oneal 1994; Alesina and Dollar 1998; and Jessup 1999+ 33+ For presentational reasons I only include the fixed-effects results+ All results are the same in both the random and fixed-effects regressions unless noted+ 596 International Organization