Political Parties and Foreign Direct Investment Inflows Among Developing Countries

This paper focuses on the nature of party systems to explain variations in FDI inflows within developing democracies. We hypothesize a positive relationship between the effective number of parliamentary parties (ENPPs) and FDI inflows. Large ENPPs are indicative of the expropriation risks as well as stability of the political environment of host countries. We thus argue that expropriation risks are low when the presence of multiple parties makes drastic, impulsive changes in economic policies difficult. We also suggest that a larger number of parties represent diverse societal interests better, reducing the chances of under-represented social groups driving political instability. The relationship between ENPP and FDI inflows is tested on a sample of 56 developing democracies from 1985 to 2011. The evidence presented lends strong support to the argument and is found robust to a number of alternative empirical scenarios.