The Politics of Attracting Foreign Direct Investment: Why Some Countries Welcome it While Others Quietly Resist it

Governments around the world fiercely compete to attract the lion’s share of global Foreign Direct Investment (FDI). To do so, they typically offer tax incentives, build infrastructure, and promote themselves as attractive destinations for multinational enterprises. This is because FDI is widely considered a powerful tool that contributes to economic growth by bringing capital and technology and creating jobs. Yet, despite these obvious incentives, countries differ substantially in their ability and willingness to attract FDI. As Figure 1 illustrates, FDI inflows do not follow a simple pattern, suggesting that deeper institutional and political factors help explain where global capital ultimately flows. The conventional explanation is that foreign investment flows to stable, predictable, and market-friendly contexts. Countries with strong institutions, transparent regulations, and open economies are expected to attract more FDI than those without. But this view assumes that all governments share the same objective, which is maximizing economic growth. Well, the truth is that they do not.

Figure 1. Foreign direct investment inflows as a share of GDP across developed and developing economies (World Bank data).

Political power comes before economic growth

To understand why, we need to move beyond international economics and deep dive into the origins of political economy. A key insight, developed by the Nobel Laureates Acemoglu and Robinson (2006), is that governments are not neutral agents striving for more societal welfare. Instead, political elites are primarily concerned with maintaining power. Economic development, including the inflow of FDI, is not politically neutral. In fact, it can reshape the distribution of income, create new economic actors, and empower groups that were previously excluded from influence. In doing so, it may destabilize existing political arrangements. This creates what Acemoglu and Robinson call the “political replacement effect”, that is reforms that increase economic output may simultaneously increase the likelihood that current elites lose power. From this perspective, resistance to FDI is not irrational. Governments may block or discourage economically beneficial FDI inflows if they threaten political survival. FDI, therefore, is not just an economic opportunity. It can become a form of political risk.

Why FDI is not always welcome

At first glance, FDI appears undisputably beneficial. It provides access to capital, facilitates technology transfer, and generates employment. A large body of research confirms its potential to enhance productivity and economic growth at the national level. However, these benefits are neither taken for granted nor evenly distributed. Foreign firms often rely on high-skilled labor, potentially increasing income inequality. They may disrupt local industries, change competitive dynamics, and shift bargaining power within the economy. In democratic regimes, these distributional effects can generate political backlash. On the other hand, in authoritarian regimes, they can upset delicate internal balances among elite factions. In other words, FDI is not simply a financial inflow. It is a structural transformation of the host economy. And structural transformations have political consequences.

A non-linear relationship: the role of political competition

Recent research by Maimone Ansaldo Patti et al. (2026) published in the Journal of International Business Studies offers an interesting view of how political systems shape FDI attraction. Rather than a simple comparison between democracies and autocracies, their evidence-based research points to a non-linear relationship between political competition and FDI inflows. At one end of the spectrum, highly competitive democracies have strong incentives to attract FDI. Political leaders depend on economic performance to secure re-election, and FDI is a visible and effective way to stimulate growth. In such environments, governments actively engage with multinational firms, offering stable regulatory frameworks and investor-friendly policies. At the other end, strong, entrenched autocracies may also attract significant FDI. The argument is that, with little threat of political replacement, ruling elites are confident they will retain control of the rents generated by economic growth. This stability allows them to commit credibly to long-term policies and reassure foreign investors.

The middle ground, however, is less favorable. Weaker autocracies, where political power is contested among elite factions, may hesitate to attract FDI. The benefits of FDI may not be fully captured if power shifts, reducing incentives to pursue long-term economic strategies. Similarly, entrenched democracies with limited electoral competition may lack urgency. Without strong political pressure to deliver economic results, governments may become complacent. 

The result is a U-shaped relationship where both highly competitive democracies and stable autocracies attract more FDI, while intermediate political systems perform worse (see Figure 2 below). This insight challenges the simplistic assumption that “more democracy” always leads to better economic outcomes. What matters is not regime type per se, but the incentives faced by those in power.

Figure 2. Political competition and FDI: U-shaped relationship (Source: Maimone Ansaldo Patti et al., 2026)

Not all investment is created equal

Even when countries succeed in attracting FDI, the outcomes vary significantly. Some economies experience substantial productivity gains and technological upgrading, while others see limited benefits. The study by Maimone Ansaldo Patti et al. (2026) suggests that the impact of FDI depends not only on its quantity but also on its quality and diversity. Countries that receive FDI from a broad range of sources, and particularly from technologically advanced economies, tend to experience stronger growth effects. These investments bring diverse knowledge, capabilities, and linkages that enhance the host country’s absorptive capacity (Jha et al., 2024).

Conversely, reliance on a narrow set of investors or low-value-added activities may limit the benefits of FDI. Without the institutional and human capital capacity to absorb new knowledge, countries may fail to translate investment into long-term development. In this sense, attracting FDI is only part of the challenge. The more difficult task is ensuring that it contributes meaningfully to economic transformation.

The democratic dilemma

These dynamics lead to an uncomfortable conclusion. Democracies, with their emphasis on accountability and representation, are often seen as the ideal institutional framework for economic development. Yet, the same features that make them desirable may also constrain their ability to attract and sustain FDI. Rising inequality, a frequent byproduct of globalization, can generate political resistance to FDI. Voters who perceive themselves as losing from economic integration may oppose policies that favor foreign investors. 

Governments, in turn, may respond by tightening regulations or limiting openness. Autocracies, by contrast, face fewer such constraints. While they must manage internal elite dynamics, they are less exposed to public backlash. This allows them, in some cases, to pursue more aggressive investment-attraction strategies. This does not imply that autocracies are superior economic systems. Rather, it shows that political accountability can complicate economic competitiveness in a globalized economy.

Rethinking the geography of global investment

The global distribution of foreign investment is often explained in terms of market size, factor costs, and institutional quality. These factors matter. But they are only part of the story.

At a deeper level, the geography of FDI reflects governments' political incentives. Countries attract FDI not simply because they are able to, but because those in power choose to prioritize it, and are willing to deal with its political consequences. This perspective helps explain why some countries actively pursue foreign capital while others, less visibly, do not. It also suggests that the future of globalization will be shaped not only by economic forces, but by the evolving relationship between political power and economic change. FDI does not always flow to the most efficient economies. It also flows to the most politically aligned ones. And that is a far more complex story than one might think.

References

• Acemoglu, D., & Robinson, J. A. (2006). Economic backwardness in political perspective. American Political Science Review, 100(1), 115–131. https://doi.org/10.1017/S0003055406062046

• Jha, S., & Awate, S., & Mudambi, R. (2024). A multilateral network perspective on inward FDI. Journal of International Business Studies, 55(3), 303–325. https://doi.org/10.1057/s41267-023-00650-x

• Maimone Ansaldo Patti, D., Mudambi, R., & Navarra, P. (2026). Do political systems affect economic outcomes? The geography of inward FDI and its relationships with growth and inequality. Journal of International Business Studies.https://doi.org/10.1057/s41267-026-00849-8