A Two-Dimensional Framework of National Governance and Its Effects on Attracting Foreign Direct Investment

Abstract

This paper presents a comprehensive framework for understanding how different national governance systems influence multinational corporationsʼ (MNCs) location choices for foreign direct investment (FDI). The framework moves beyond the binary classification of political regimes (democracy vs. autocracy) by integrating both political and economic governance into a two-dimensional analysis. The study proposes that autocratic capitalist regime is more effective in attracting FDI for developing countries, while democratic capitalist regime is more attractive for developed countries. Using comparative analysis of China and India (developing) and the US and the European Union (developed), the paper illustrates how the interaction between political and economic governance shapes FDI attractiveness of host countries. The findings contribute to international business and political economy literature by offering a more comprehensive understanding of how national governance systems impact FDI attractiveness, and provide valuable insights for policymakers aiming to enhance the host countryʼs FDI attractiveness.