The Political Economy of FDI 601 ingly,countries with higher levels of natural resources also attract higher levels of FDI flows. In this analysis,government consumption has a large negative effect on a coun- try's ability to attract FDI,consistent with other works that find it to have a neg- ative effect on economic growth.so This result is only statistically significant in the first two models.The empirical result on the effects of budget deficits on FDI performance confirms the previous hypothesis.Countries with higher budget def- icits (large negative numbers in the data)attract higher levels of FDI. Surprisingly,DEVELOPMENT LEVEL seems to have no consistent statistically sig- nificant effect,which can be interpreted as finding that international capital,even when other domestic factors are controlled for,does not flow from the rich coun- tries to the poorer countries of the world.Much of the work on economic growth done by Robert Barro argues for conditional convergence'-that when domestic factors are controlled for,the less-developed countries grow at faster rates than more-developed countries.s!This empirical finding highlights one microfounda- tional flaw in this argument,where growth-promoting FDI flows are not attracted at any higher rate to the developing countries than the developed countries. This result for economic growth is the opposite of what most of the economic literature would expect.Countries with higher levels of economic growth gener- ally attract lower levels of FDI.A number of potential theories could explain this result,but the most obvious would be the'scaling effect'mentioned earlier,where countries that have growth rates exceeding the growth in FDI have a decrease in FDI as a percentage of GDP.Another alternative explanation would attribute this result to business cycles,specifically in that during the 1980s (the period of the independent variables),a number of the industrialized countries were in recession. I find evidence for this business cycle explanation in the fourth section using panel analysis. Models(3)and (4)include the measure of capital controls on FDI inflows.Coun- tries are coded as a 1 if there are no controls on FDI inflows,and a 0 if there are controls.Although the addition of this variable as a control has no significant ef- fect on the other variables,the result is interesting in itself.Countries with restric- tions on FDI inflows actually attract higher levels of FDI inflows than countries with no FDI restrictions.This is not to say that capital controls have the opposite effect to which they are intended,but rather that there are a number of serious selection issues.Simply put,countries that will not attract FDI flows will not em- ploy capital controls,while countries that attract high levels of FDI may find a political or economic need to control these inflows. The empirical results in Table 2 provide solid evidence of the positive effect of democracy on FDI inflows.There is an obvious linear positive relationship be- 50.Barro1990. 51.The basis of the concept of convergence comes from Solow 1956.See Barro 1996 for a discus- sion of conditional convergence and empirical results.ingly, countries with higher levels of natural resources also attract higher levels of FDI flows+ In this analysis, government consumption has a large negative effect on a coun￾try’s ability to attract FDI, consistent with other works that find it to have a neg￾ative effect on economic growth+ 50 This result is only statistically significant in the first two models+ The empirical result on the effects of budget deficits on FDI performance confirms the previous hypothesis+ Countries with higher budget def￾icits ~large negative numbers in the data! attract higher levels of FDI+ Surprisingly, development level seems to have no consistent statistically sig￾nificant effect, which can be interpreted as finding that international capital, even when other domestic factors are controlled for, does not flow from the rich coun￾tries to the poorer countries of the world+ Much of the work on economic growth done by Robert Barro argues for ‘conditional convergence’—that when domestic factors are controlled for, the less-developed countries grow at faster rates than more-developed countries+ 51 This empirical finding highlights one microfounda￾tional flaw in this argument, where growth-promoting FDI flows are not attracted at any higher rate to the developing countries than the developed countries+ This result for economic growth is the opposite of what most of the economic literature would expect+ Countries with higher levels of economic growth gener￾ally attract lower levels of FDI+ A number of potential theories could explain this result, but the most obvious would be the ‘scaling effect’ mentioned earlier, where countries that have growth rates exceeding the growth in FDI have a decrease in FDI as a percentage of GDP+ Another alternative explanation would attribute this result to business cycles, specifically in that during the 1980s ~the period of the independent variables!, a number of the industrialized countries were in recession+ I find evidence for this business cycle explanation in the fourth section using panel analysis+ Models ~3! and ~4! include the measure of capital controls on FDI inflows+ Coun￾tries are coded as a 1 if there are no controls on FDI inflows, and a 0 if there are controls+ Although the addition of this variable as a control has no significant ef￾fect on the other variables, the result is interesting in itself+ Countries with restric￾tions on FDI inflows actually attract higher levels of FDI inflows than countries with no FDI restrictions+ This is not to say that capital controls have the opposite effect to which they are intended, but rather that there are a number of serious selection issues+ Simply put, countries that will not attract FDI flows will not em￾ploy capital controls, while countries that attract high levels of FDI may find a political or economic need to control these inflows+ The empirical results in Table 2 provide solid evidence of the positive effect of democracy on FDI inflows+ There is an obvious linear positive relationship be- 50+ Barro 1990+ 51+ The basis of the concept of convergence comes from Solow 1956+ See Barro 1996 for a discus￾sion of conditional convergence and empirical results+ The Political Economy of FDI 601