The Primacy of Governance Infrastructure versus Democracy in Development and FDI in Developing Countries

Abstract

Most scholars believe that democracies guarantee the rule of law and provide superior institutions, which influence developing states' development trajectories, as well as firms' decisions on where to do business. However, I argue that these superior institutions are prior to the institutions of democracy and constitute the concept of governance infrastructure, and are therefore the key institutional determinants of state's economic outcomes. I find that the institutions that comprise a state's governance infrastructure (GI) are separate conceptually from the institutions that comprise democracy, and that the quality of developing states' GI 1) must reach a certain threshold before democracy positively affects economic development; 2) sends a signal to investors concerning potential transaction costs that investors may incur, ultimately determining the amount of FDI developing states' receive, while being the only domestic institutions that affect investors decision making; 3) determines the quality and provision of a state's intermediary public goods, which are an additional causal mechanism to signaling in determining a state's FDI inflows.