Democratic Institutions and Investment Inflows 177 While Olson,O'Donnell and others offer useful insights about the expected ef- fect of democratic institutions on FDI inflows to the developing countries,they disagree on the direction of the effect.In this article,we offer a theoretical syn- thesis and extension.Basing our theory on the logic of why firms invest abroad, we argue that democratic institutions have conflicting effects on FDI infows.On one hand,democratic institutions hinder FDI inflows through three avenues.First, democratic constraints over elected politicians tend to weaken the oligopolistic or monopolistic positions of MNEs.Second,these constraints further prevent host governments from offering generous financial and fiscal incentives to foreign in- vestors.Third,broad access to elected officials and wide political participation offer institutionalized avenues through which indigenous businesses can seek pro- tection.In each case,the increased pluralism ensured by democratic institutions generates policy outcomes that reduce the MNE's degree of freedom in the host developing country.On the other hand,democratic institutions promote FDI in- flows by strengthening property rights protection.The representation of the inter- ests of common citizens in the legislature prevents the state from predatory rent seeking.Constraints over elected politicians further guarantee contract enforce- ment for businesses.These effects generate credible property rights protection, reducing risks for foreign investors and encouraging foreign investment.Hence, the net effect of democratic institutions on FDI inflows to the developing coun- tries is contingent on the relative strength of these two competing forces. Existing empirical work rarely explores the effect of democracy on FDI.Oneal stands out as the first quantitative study of how regime characteristics affect FDI.2 He examines whether foreign firms invest more and collect more profit in author- itarian countries than in democracies.He finds that the relationship between re- gime type and FDI flows is not statistically significant,and that returns on investment are best in developed democracies but greater in authoritarian coun- tries among LDCs.While Oneal addresses democracy-FDI connections,he does not consider the competing effects of democracy.In addition,he focuses on FDI from the United States to LDCs dyadically and covers a different time frame.13 11.Looking at a different dependent variable (borrowing in the international capital market),Sobel also examines the effects of property rights institutions(the regulatory state)and democracy (the par- ticipatory state).He finds that the regulatory state affects international borrowing significantly while the participatory state affects such borrowing subtly.Borrowers from more democratic developing coun- tries can borrow more than their less democratic peers,but this relationship does not hold where the regulatory state is weak and corrupt.While our arguments are similar,FDI and international borrow- ing are different phenomena,driven by different causal logics.Sobel 1999. 12.0neal1994. 13.Several authors consider the effects of other political factors on FDI.Chan and Mason find that country size,level of industrialization,alignment with the United States,and strength of central gov- ernment increase FDI inflows.Jun and Singh find that industrial disputes reduce FDI.Enders and San- dler find that terrorism reduces FDI in Spain and Greece from 1968 to 1991.Crenshaw finds that growth and over-urbanization are associated with increased FDI penetration,arguing that the level of FDI can be explained without reference to political factors.Schneider and Frey find that political in- stability decreases FDI flows but other political factors,including government ideology,are insignifi- cant.Chan and Mason 1992;Jun and Singh 1996;Enders and Sandler 1996;Crenshaw 1991;and Schneider and Frey 1985.Democratic Institutions and Investment Inflows 177 While Olson, O'Donnell and others offer useful insights about the expected ef￾fect of democratic institutions on FDI inflows to the developing countries, they disagree on the direction of the effect. In this article, we offer a theoretical syn￾thesis and extension. Basing our theory on the logic of why firms invest abroad, we argue that democratic institutions have conflicting effects on FDI inflows. On one hand, democratic institutions hinder FDI inflows through three avenues. First, democratic constraints over elected politicians tend to weaken the oligopolistic or monopolistic positions of MNEs. Second, these constraints further prevent host governments from offering generous financial and fiscal incentives to foreign in￾vestors. Third, broad access to elected officials and wide political participation offer institutionalized avenues through which indigenous businesses can seek pro￾tection. In each case, the increased pluralism ensured by democratic institutions generates policy outcomes that reduce the MNE's degree of freedom in the host developing country. On the other hand, democratic institutions promote FDI in￾flows by strengthening property rights protection. The representation of the inter￾ests of common citizens in the legislature prevents the state from predatory rent seeking. Constraints over elected politicians further guarantee contract enforce￾ment for businesses. These effects generate credible property rights protection, reducing risks for foreign investors and encouraging foreign investment. Hence, the net effect of democratic institutions on FDI inflows to the developing coun￾tries is contingent on the relative strength of these two competing forces." Existing empirical work rarely explores the effect of democracy on FDI. Oneal stands out as the first quantitative study of how regime characteristics affect FDI.I2 He examines whether foreign firms invest more and collect more profit in author￾itarian countries than in democracies. He finds that the relationship between re￾gime type and FDI flows is not statistically significant, and that returns on investment are best in developed democracies but greater in authoritarian coun￾tries among LDCs. While Oneal addresses democracy-FDI connections, he does not consider the competing effects of democracy. In addition, he focuses on FDI from the United States to LDCs dyadically and covers a different time frame." 11. Looking at a different dependent variable (borrowing in the international capital market), Sobel also examines the effects of property rights institutions (the regulatory state) and democracy (the par￾ticipatory state). He finds that the regulatory state affects international borrowing significantly while the participatory state affects such borrowing subtly. Borrowers from more democratic developing coun￾tries can borrow more than their less democratic peers, but this relationship does not hold where the regulatory state is weak and corrupt. While our arguments are similar, FDI and international borrow￾ing are different phenomena, driven by different causal logics. Sobel 1999. 12. Oneal 1994. 13. Several authors consider the effects of other political factors on FDI. Chan and Mason find that country size, level of industrialization, alignment with the United States, and strength of central gov￾ernment increase FDI inflows. Jun and Singh find that industrial disputes reduce FDI. Enders and San￾dler find that terrorism reduces FDI in Spain and Greece from 1968 to 1991. Crenshaw finds that growth and over-urbanization are associated with increased FDI penetration, arguing that the level of FDI can be explained without reference to political factors. Schneider and Frey find that political in￾stability decreases FDI flows but other political factors, including government ideology, are insignifi￾cant. Chan and Mason 1992; Jun and Singh 1996; Enders and Sandler 1996; Crenshaw 1991; and Schneider and Frey 1985