2026/06/30 by Botond Kapás
Business, Management and Accounting · Economics, Econometrics and Finance · #Autocracy #Counterfactual thinking #Democracy #Democratization #Estimator #Foreign direct investment #Global Financial Crisis and Policies #Global trade and economics #International Business and FDI #Robustness (evolution)
paper · doi:10.1556/032.2026.00544
openalex publication_date 2026/06/30 · crossref created 2026/06/30 · openalex created_date 2026/07/01 · crossref issued 2026/07/03 · crossref published 2026/07/03 · crossref published-print 2026/07/03 · openalex updated_date 2026/07/25 · crossref deposited 2026/07/29 · crossref indexed 2026/07/29
Abstract This paper examines how a discrete transition from autocracy to democracy affects FDI inflows, shifting the focus from cross-country average marginal effects to within-country dynamic adjustment. Using Indonesia's 1998 democratic transition as a case study, the analysis applies low-rank panel methods – matrix completion and interactive fixed effects counterfactual estimator – to construct a counterfactual trajectory of FDI inflows under continued autocracy. The results reveal a pronounced and economically large decline in FDI inflows relative to the counterfactual in the immediate post-transition period. This negative treatment effect diminishes over time, with observed FDI inflows converging toward the counterfactual path in the long run. However, no sustained democratic premium is observed within the sample period. These findings suggest that the impact of democratization on FDI inflows in Indonesia follows a time-dependent adjustment pattern, consistent with the cross-country trajectory identified by Lacroix et al. (2021), rather than reflecting a uniform effect. A range of robustness checks supports the stability of the findings, including placebo-in-time and equivalence tests, alternative treatment timings, donor pool sensitivity analyses, and variations in the pretreatment period.