Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries Quan Li and Adam Resnick Increasing economic globalization and the diffusion of political democracy are arguably the two most important characteristics of contemporary international po- litical economy.As a salient dimension of globalization,foreign direct investment (FDI)inflows have grown faster than world income since the 1960s,multinational enterprises(MNEs)now account for about 70 percent of world trade,and the sales of their foreign affiliates have exceeded total global exports.Foreign production capital has dispersed to almost all developing countries since the 1980s,and the number of foreign affiliates located in developing economies has reached 129,771, compared with 93,628 in the developed world.2 Paralleling this economic struc- tural change is the spread of liberal or representative democracy.A growing number of less-developed countries (LDCs)have experienced increased political participation,open competition for elected office,and expanding civil society.The proportion of democratic and partially democratic countries rose from about 31 percent in 1975 to about 73 percent in 1995.3 The flood of FDI and the diffusion of democratic governance have come to an inevitable encounter.While the effect of FDI on democracy has long attracted both scholarly attention and public interest,*the effect of democracy on FDI is surpris- ingly understudied and poorly understood.Explaining the effect of democratic in- stitutions on FDI,however,has clear significance for both theory and policy.Many We thank Steve Chan,Jim Eisenstein,Erik Gartzke,John Oneal,Andrew Sobel,Holloway Sparks, Peter Gourevitch,David Lake,Lisa Martin,and two anonymous referees for their helpful comments and suggestions.We thank Monica Lombana for research assistance.An earlier version of this article was presented at the ISA Annual Meeting,2001,Chicago.Replication data are available from the authors upon request. 1.Held et al.1999. 2.Ibid.,245. 3.Ibid,47. 4.Some examples of empirical examinations include Bornschier,Chase-Dunn,and Rubinson 1978; Jackman 1982;de Soysa and Oneal 1999;Li and Reuveny forthcoming;and Quinn 2000. International Organization 57,Winter 2003,pp.175-211 2003 by The IO Foundation. D0L:10.1017/S0020818303571077Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries Quan Li and Adam Resnick Increasing economic globalization and the diffusion of political democracy are arguably the two most important characteristics of contemporary international po￾litical economy. As a salient dimension of globalization, foreign direct investment (FDI) inflows have grown faster than world income since the 1960s, multinational enterprises (MNEs) now account for about 70 percent of world trade, and the sales of their foreign affiliates have exceeded total global exports.' Foreign production capital has dispersed to almost all developing countries since the 1980s, and the number of foreign affiliates located in developing economies has reached 129,77 1, compared with 93,628 in the developed world.' Paralleling this economic struc￾tural change is the spread of liberal or representative democracy. A growing number of less-developed countries (LDCs) have experienced increased political participation, open competition for elected office, and expanding civil society. The proportion of democratic and partially democratic countries rose from about 3 1 percent in 1975 to about 73 percent in 1995." The flood of FDI and the diffusion of democratic governance have come to an inevitable encounter. While the effect of FDI on democracy has long attracted both scholarly attention and public interest,"he effect of democracy on FDI is surpris￾ingly understudied and poorly understood. Explaining the effect of democratic in￾stitutions on FDI, however, has clear significance for both theory and policy. Many We thank Steve Chan, Jim Eisenstein, Erik Gartzke, John Oneal, Andrew Sobel, Hollouay Sparks, Peter Gourevitch, David Lake, Lisa Martin, and two anonymous referee, for their helpl'ul comment\ and suggestions. We thank Monica Lonibana for research assistance. An earlier ver\ion of this article was presented at the ISA Annual Meeting, 2001, Chicago. Replication data are available from the authors upon request. 1. Held et al. 1999. 2. Tbid., 245. 3. Ibid., 47. 4. Some examples of empirical examinations include Bornschier, Chase-Dunn, and Ruhinson 1978; Jackman 1982; de Soysa and Oneal 1999; Li and Reuveny forthcoming; and Quinn 2000. International Organiiariot~ 57, Winter 2003, pp. 175-21 1 O 2003 by The 10 Foundation. DOT: 10.1017/S00208 18303571077