Examination of Democratic States

This chapter uses theory from the prior chapters of this book to develop a set of hypotheses relating to the political economy of foreign investment in democratic states. Because democratic states feature political competition as an inherent quality, investor certainty stems not from policy consistency, but rather from legal protections and property rights which limit the degree to which government actions can harm business. Such protections generally arise when the number of economic elites is great enough to reduce the value of private benefits and incentivize the support of public goods (i.e., strong legal protections). As a result, this chapter lays out a set of hypotheses with regard to the number of economic elites that are much the opposite of what is observed in nondemocratic states. Namely, a greater number of competing economic elites in a democratic state will be associated with increased investment inflows to that state, both in the form of FDI and FPI. In the analysis that follows, this chapter uses the World Bank and World Federation of Exchanges to substantiate these claims and also explores two brief case vignettes where the number of economic elites created impactful incentives toward the legal framework for investment, namely in the cases of Chile and Brazil.