How does social development affect FDI and domestic investment?
Creating a favourable investment climate is crucial for economic development. In this study, we explore the impact of social development variables on FDI and private domestic investment, using panel data from 75 countries for the period 1989-2000. Our results show that reducing corruption leads to an increase in domestic investment. Though we do not find a significant impact of corruption on FDI, previous studies have established a similar relationship for FDI. Thus there is evidence to suggest that combating corruption can have a beneficial effect on both domestic and foreign investment. Our results indicate that improvements in political rights and civil liberties tend to increase FDI. In contrast, political freedom appears to have a negative effect on domestic investment. However, other studies suggest that democratization has a positive impact on corruption, which makes the total effect of political freedom on domestic investment ambiguous. A few other social development variables are found to have an impact on one of the two types of investment. Religious tensions appear to deter FDI, but have no impact on domestic investment. In addition, socio-economic conditions could affect domestic investment through savings.
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