Democracy and foreign direct investment in BRICS-TM countries for sustainable development

Abstract

The study aims to examine the long-term cointegration between the democracy index and foreign direct investment (FDI). The sample group chosen for this investigation comprises BRICS-TM (Brazil, Russia, India, China, South Africa, Turkey [Türkiye], and Mexico) countries due to their increasing strategic importance and potential growth in the global economy. Data from 1994 to 2018 were analyzed, with panel data analysis techniques employed to accommodate potential structural breaks. The level of democracy serves as the independent variable in the model, while FDI is the dependent variable. Inflation and income per capita are considered control variables due to their impact on FDI. The analysis revealed a long-term relationship with structural breaks among the model’s variables. Democratic progress and FDI demonstrate a correlated, balanced relationship over time in these countries. Therefore, governments and policymakers in emerging economies aiming to attract FDI should account for structural breaks and the correlation between democracy and FDI. Furthermore, the Kónya causality tests revealed a causality from democracy to FDI at a 1% significance level in Mexico, 5% in China, and 10% in Russia. From FDI to democracy (DEMOC), there is causality at a 5% significance level in Mexico and a 10% significance level in Russia. Thus, the findings suggest that supporting democratic development with macroeconomic indicators in BRICS-TM countries will positively impact foreign direct capital inflows. Graphical Abstract: (Figure presented.). © The Author(s) 2024.