178 International Organization Resnick analyzes how democratic transition affects FDI,though he does not con- sider the role of property rights independent of democratic institutions.He finds that transition to democracy has a statistically significant negative effect on FDI.14 Our theory identifies the causal avenues through which democratic institutions promote or hinder FDI inflows.We assess quantitatively both the positive and neg- ative effects of democratic institutions on FDI inflows with empirical tests cover- ing fifty-three developing countries from 1982 to 1995.We find that both property rights protection and democracy-related property rights protection encourage FDI inflows while democratic institutions improve private property rights protection. After controlling for the positive effect of democracy via property rights protec- tion,democratic institutions reduce FDI inflows.These results support our theo- retical claims and are robust against alternative model specifications,statistical estimators,and variable measurements. The article proceeds as follows.We first elaborate our theory on the effects of democratic institutions on FDI inflows.Next,we discuss the research design and the results of our empirical analyses.We conclude with a discussion of implica- tions of our findings. A Theory on How Democratic Institutions Affect FDI Inflows Our theory on the effects of democratic institutions on FDI inflows is based on the logic of why firms invest abroad.As shown below,the level of FDI inflows hinges on the interactions between MNEs and host countries.By affecting these inter- actions,democratic institutions encourage or deter foreign direct investors. Why Do Firms Invest Abroad? As widely accepted,FDI implies that a multinational enterprise organizes produc- tion of goods and services in more than one country,involving the transfer of assets or intermediate products within the investing enterprise and without any change in ownership.It involves additional costs of setting up and operating fac- tories in foreign lands.Given the disadvantages of operating overseas,why do some firms locate their production abroad instead of at home?Why do they own foreign production facilities instead of serving the intended market with such al- ternative means as trade or licensing?Why do they invest in one country instead of another?The logic of international production behind these questions holds the answer to how political institutions affect FDI inflows to the developing coun- tries.Our discussion draws heavily from John Dunning's eclectic paradigm of in- ternational production,15 which encompasses various competing explanations, 14.Resnick 2001. 15.Dunning 1988 and 1993.178 International Organization Resnick analyzes how democratic transition affects FDI, though he does not con￾sider the role of property rights independent of democratic institutions. He finds that transition to democracy has a statistically significant negative effect on FDI.I4 Our theory identifies the causal avenues through which democratic institutions promote or hinder FDI inflows. We assess quantitatively both the positive and neg￾ative effects of democratic institutions on FDI inflows with empirical tests cover￾ing fifty-three developing countries from 1982 to 1995.We find that both property rights protection and democracy-related property rights protection encourage FDI inflows while democratic institutions improve private property rights protection. After controlling for the positive effect of democracy via property rights protec￾tion, democratic institutions reduce FDI inflows. These results support our theo￾retical claims and are robust against alternative model specifications, statistical estimators, and variable measurements. The article proceeds as follows. We first elaborate our theory on the effects of democratic institutions on FDI inflows. Next, we discuss the research design and the results of our empirical analyses. We conclude with a discussion of implica￾tions of our findings. A Theory on How Democratic Institutions Affect FDI Inflows Our theory on the effects of democratic institutions on FDI inflows is based on the logic of why firms invest abroad. As shown below, the level of FDI inflows hinges on the interactions between MNEs and host countries. By affecting these inter￾actions, democratic institutions encourage or deter foreign direct investors. Why Do Firms Invest Abroad? As widely accepted, FDI implies that a multinational enterprise organizes produc￾tion of goods and services in more than one country, involving the transfer of assets or intermediate products within the investing enterprise and without any change in ownership. It involves additional costs of setting up and operating fac￾tories in foreign lands. Given the disadvantages of operating overseas, why do some firms locate their production abroad instead of at home? Why do they own foreign production facilities instead of serving the intended market with such al￾ternative means as trade or licensing? Why do they invest in one country instead of another? The logic of international production behind these questions holds the answer to how political institutions affect FDI inflows to the developing coun￾tries. Our discussion draws heavily from John Dunning's eclectic paradigm of in￾ternational production,15 which encompasses various competing explanations, 14. Resnick 2001. 15. Dunning 1988 and 1993