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FDI and Democratic Governance, Evidence from a Panel VAR Model
Unformatted Document Text:  FDI and Democracy, Evidence from a Panel VAR Model Instruction Foreign Direct Investment, or multinational corporation activities, is one of the most striking features of economic globalization. Although before the 1990s, developed countries were the primary FDI receivers, and the absolute FDI flows to developing countries were relatively small. Over the past two decades, there has been a surge in the number, size, and influences of FDI in developing countries. FDI inflows to developing countries began to increase enormously in the 1990s. In 1990, North-South FDI flows represented less than 15% of the world total; by 1996 that share had swelled to 40%. The ratio of FDI inflows to GDP in these less developed countries amounted to an annual average of 1.9 % in this period, while the same figure for high-income OECD countries was only 1.4 %, indicating a higher relevance of FDI to developing countries (World Bank, 2002). If it is true that before the 1990s the leaders in most developing countries regarded FDI and multinationals as a threat and an exploitation tool of developed countries, then this hostile viewpoint has been changed in the last two decades. Along with the trend of worldwide globalization and economic growth, by the late 1980s many developing countries had moved away from state directed, inwardly focused strategies towards an acceptance of both markets and integration into the world economy (World Bank 1991). In response to the rapid changes in technological and economic conditions, leaders in less developed countries came to believe that integration into the world economy was a prerequisite to growth and development. FDI from multinational corporations is seen by 2

Authors: Sun, Feng.
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FDI and Democracy, Evidence from a Panel VAR Model
Instruction
Foreign Direct Investment, or multinational corporation activities, is one of the
most striking features of economic globalization. Although before the 1990s, developed
countries were the primary FDI receivers, and the absolute FDI flows to developing
countries were relatively small. Over the past two decades, there has been a surge in the
number, size, and influences of FDI in developing countries. FDI inflows to developing
countries began to increase enormously in the 1990s. In 1990, North-South FDI flows
represented less than 15% of the world total; by 1996 that share had swelled to 40%. The
ratio of FDI inflows to GDP in these less developed countries amounted to an annual
average of 1.9 % in this period, while the same figure for high-income OECD countries
was only 1.4 %, indicating a higher relevance of FDI to developing countries (World
Bank, 2002).
If it is true that before the 1990s the leaders in most developing countries regarded
FDI and multinationals as a threat and an exploitation tool of developed countries, then
this hostile viewpoint has been changed in the last two decades. Along with the trend of
worldwide globalization and economic growth, by the late 1980s many developing
countries had moved away from state directed, inwardly focused strategies towards an
acceptance of both markets and integration into the world economy (World Bank 1991).
In response to the rapid changes in technological and economic conditions, leaders in less
developed countries came to believe that integration into the world economy was a
prerequisite to growth and development. FDI from multinational corporations is seen by
2


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