No Strings Attached? FDI, Ideology, and Levels of Democracy in Latin America

How does foreign direct investment (FDI) affect the levels of democracy in developing states when taking their political ideologies into consideration? Scholars have traditionally viewed FDI as conducive to economic and political liberalization in developing countries. However, few studies have analyzed the effects of FDI on democracy or how the political ideologies of host governments might condition the effects of FDI. This investigation identifies two separate types of FDI at play in Latin America−state-led and market-led FDI−epitomized by Chinese and American multinational corporations (MNCs), respectively. I hypothesize that state-led FDI will have no effect on the levels of democracy in Latin America and no preference towards regime ideology due to a lack of precedent in the literature. In contrast, market-led FDI will increase levels of democracy due to its propensity to open domestic economies to international influence. However, depending on regime ideology, the effects of FDI on levels of democracy will vary. This paper tests the effects of market-led and state-led FDI on levels of democracy in Latin America from 2003 to 2012 through time-series, cross-sectional OLS regressions. Results show a general, negative effect from state-led and market-led FDI on democracy. Although, when considering the interaction between ideology and FDI, US and Chinese MNCs positively influence the democracies of politically conservative regimes and negatively influence politically liberal regimes.