In today's global economy, Foreign Direct Investment (FDI) is an essential link among national economies as well as a catalyst for economic growth. The benefits that FDI brings, such as capital, knowledge, technology, skills, management know-how, market access, and employment opportunities are important for development as complements to domestic resources in host countries. As such, it is aggressively sought by many countries. FDI does not, however, flow evenly to all. Particularly in the developing world, only a handful of countries are able to attract investments that are commensurate with their market potential. Even when the necessary firm-level incentives and host-country economic conditions are present, some countries fail to provide a welcoming investment environment in the form of policy incentives, guarantees, and stability. Why are some countries able to offer investor-friendly policies and some are not? Which political institutions produce the policies that prove beneficial to multinational operations? Does democracy matter in attracting FDI? These are the central questions of this book.

There is an extensive literature on economic and policy determinants of FDI flows, yet much less attention has been devoted to the role of political institutions in producing a favorable investment environment to attract foreign capital. Foreign companies undertake significant political risks when they invest in a host country. Conditional upon the ease with which they can withdraw their assets, they fear the risk of government interference, be it nationalization, shifting tax burdens, or new regulatory requirements.