While the effect of democracy on inward FDI is important, the research on this effect has been conflicting and inconclusive. The inconsistencies suggest that the effects of political institutions are potentially contingent on the broader institutional milieu in each country. Thus, this study examines how other major formal institutions and informal institutions moderate the relationship between democratic political institutions and inward FDI. Our theory explains (1) why democratic political institutions alone are unlikely to have direct and consistent effects on inward FDI and (2) how they interact with other institutions. The results show that democratic political institutions have a positive effect in countries with strong regulatory institutions, strong economic institutions, and cultures that value individualism and the motivation to achieve and succeed. We conclude that identifying the effects of any single institution requires understanding the surrounding institutional milieu and the combinative effects of the institutions within this milieu.
