Political environment and foreign direct investment: Evidence from OECD countries

•This paper analyzes whether political environment influences FDI inflows.•Investors appear to avoid countries with large government and military spending.•They disfavor centrist and right-wing executives and lack of political competition.•Countries with presidential systems and long democratic tradition host more FDIs.•Clear responsibility for lawmaking is appealing to international investors.

This paper examines the role that political factors play in the investment location decisions of multinational enterprises. It has been found that foreign direct investors shy away from countries with excessive government spending, especially when this spending is directed towards the military. They also seem to have a slight preference for leftist executives and be negatively predisposed toward situations in which the ruling party has held power for prolonged periods of time. Ceteris paribus, more FDI flows to countries that have presidential systems, established political parties and where the party of the executive controls all houses with lawmaking powers.