Federalism, Democracy and Foreign Direct Investment Inflows: Are They Complementary or Competing Concepts?

Diriba Adugna Tulu


Least developed countries (LDCS) and developing countries desperately need foreign direct investment (FDI) for steady economic growth and sustainable development. Partly as a result of stiff competition due to globalization which brought about cross-border businesses through multi-national corporations (MNCs), those unfortunate economies are changing their policies and exerting their maximum potential to demonstrate themselves as favourable investment destinations in the eyes of MNCs. But, FDI comes to the host states only after thorough analysis of the benefits and costs because investors are motivated by making profits. Thus, obviously foreign direct investors opt for less risky investment. To achieve this, foreign direct investor’s seriously look in whether the host state is a democratic state, adopted functioning federalism, etc so that they would easily forecast the political risks against their investments. The tendency is that, investors will not come and continue their operations if the political risks are high while they do where the political risks are lower. However, the conceptual relationships among democracy, federalism and FDI inflows are still very concerning issues all over the world. This paper clearly shows as federalism and FDI inflows on one hand; democracy and FDI inflows on the other side are complementary than competing concepts. Federalism, democracy and FDI inflows have been regarded as a mutually reinforcing couple by many scholars to date. Hence, democratic and federal countries attract higher levels of FDI through ensuring the lowering of political risks.

Keywords: - Foreign Direct Investment, Democracy, Federalism, MNCs.

DOI: 10.7176/IAGS/68-02

Publication date:July 31st 2020


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ISSN (Paper)2224-574X ISSN (Online)2224-8951

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