This study analyses the link between social development and foreign direct investment (FDI) in developing countries. Previous empirical studies conflict in their view of the impact of wage levels and human capital on FDI, whereas some aspects of political stability appear to attract investment, and corruption deters FDI. In this study, we use panel data from 61 developing countries for the period 1989-2000, and estimate the relationship between disaggregate socio-political indices and FDI. The most robust variables influencing FDI prove to be political rights, civil liberties, democratic accountability, religious and ethnic tensions and internal conflict. Interpreting the results, the social development variables that matter for FDI flows seem to be those most closely associated with investors' perception of long term stability, whereas other social development variables have limited impact on overall FDI.

Ivar Kolstad

Associated Research Professor

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