Institutional Quality and US-FDI Outflows: Do Political Regimes Matter?

To what extent the locational decisions of US-FDI outflows are influenced by the nature of the political regimes along with the quality of institutions in the host countries? Using property rights protection as the indicator of institutional quality, this study investigates how sensitive US-FDI outflows are to institutional factors and the nature of the hosting countries’ political regimes. In other words, whether being democratic or autocratic regime make any difference in attracting US-FDI. A joint effect between democracy and the protection of property rights on US-FDI flows is examined using a panel data fixed effect technique for 41 countries during 1984-2021.Moreover, the instrumental variable method is used to check the endogeneity concerns. The results predict that the protection of property rights can have a positive impact in attracting US-FDI provided the countries become more democratic in nature. The findings suggest that the partial reform for enhancing the institutional quality or unconsolidated democratisation is insufficient in attracting US-FDI rather than complementing each other in bringing FDI. The implication of the findings reveals that a democratic country like India can be a good place for US investment if its protection of property rights becomes stronger. Moreover, some highly democratic countries with strong institutions should be more market-oriented and improve their quality of infrastructure to receive the maximum benefit. Our results are robust to alternate measures of institutional quality/democracy and endogeneity concerns.