The Effect of Democracy on FDI (Foreign Direct Investmant) - Term Paper Example

There are a number of concerns that are made when considering the effects of democracy on foreign direct investment. Theoretical perspectives have consistently linked foreign direct investment to government policy. The pervading logic behind these investments is not a matter of great complexity. In these regards, investors have been understood to remain more apt to invest long-term companies and corporate interests based on the host country’s ability to create policy measures that are most conducive to such investment.

The complexity emerges as theorists attempt to determine the appropriate government climate for such investments. Currently the United States receives the most foreign direct investments, leading economists to prominently link FDI to the democratic governmental structure (‘greyhill’). Within the confines of the democratic political structure there are a number of specific policy considerations that have been established. One of the most prominent theoretical perspectives on this matter is that foreign direct investment is directly responsive to changing economic situations.

Jensen notes, “Elected politicians can no longer manipulate monetary policy, but monetary policy does remain responsive to changing economic conditions” (Jensen, pg. 2). In this context of understanding, the nature of the democratic election process itself does not necessarily benefit foreign direct investment, but creates a governmental structure that is highly conducive to developing policies that aid FDI. The main notion is that the encouragement of foreign direct investment must be accomplished in a dynamic context and that the democratic governmental structure is most conducive to this dynamism.

In addition to the importance of a dynamic government policy to foreign direct investment, there is a number of other of elements positive linking democracy to FDI in terms of stability. In these regards, pervasive notions of democratic governments having more stability are one of the primary contributors to an increase in FDI (Jensen). While such perspectives on the democratic political structure have been proven erroneous in specific contexts, one considers the current economic fallout in Greece as a primary example; it is oftentimes the perception that drives the reality.

Another predominant link between democracy and FDI in terms of stability occurs as a result of the democratic process of checks and balances. Jensen notes, “The institutional checks and balances associated with democratic systems decrease the likelihood of policy reversal, providing multinationals with a de facto commitment to policy stability” (Jensen, pg. 4). With the stability afforded by these checks and balances, corporations are able to more accurately forecast future returns. Ultimately, it is this stability that greatly While there are considerable arguments for the linkage of democracy to foreign direct investment, counter-arguments exist to this proposition.

The main notion is that the nature of governmental policy and foreign direct investment is not as multi-varied as some would contest. This perspective contends that the overwhelming link between foreign investments in a host country is the level of taxation. Jensen notes, “Conventional wisdom holds that nations woo multinationals by