American businesses are engaged in almost every nation around the world, navigating investments and operations in a complex web of democracies, autocracies, and hybrid states on a daily basis.
Cumulative investment abroad reached $6.83 trillion at the end of 2024, according to the U.S. Bureau of Economic Analysis. Given how intertwined the American economy is with the global market, the political landscape in these countries significantly impacts the success of the American economy.
Democratic forms of government promote better economic growth, more open and stable markets for American companies, and more consistent, reliable investment climates than autocracies do, studies have shown. This important – but often overlooked – point is critical to the performance of American businesses overseas and how international investment can bolster the American economy.
Supporting democratization is not just the right thing to do for rights and justice; it is also a strategic and wise means to support American economic growth and the prospects for America’s private sector.
The well-being of American citizens and the prosperity of the United States are tied to the fate of democracy around the world. As democracy goes globally, so go the international markets and the prosperity of the United States and its citizens.
The large and dynamic Chinese market is often considered an exception to the rule. While there are naturally notable short-term benefits, it is also clear that the Chinese Communist Party’s (CCP) autocratic governance has made its sizable market highly problematic for American businesses. As the United States competes with China for global leadership economically, politically, and militarily, the United States government and businesses should question whether the possible short-term gains truly outweigh the strategic competition and economic volatility that stem from the CCP’s autocratic grip on power and global ambitions.
Democracy matters to economic growth
Scholars conducting groundbreaking research on the connection between a society’s institutions and economic prosperity received the Nobel Prize for economics in 2024. Their work about the nature of these institutions – the formal and informal rules governing how a society functions – pointed to important connections between democracy and economic growth. Drs. Daron Acemoğlu, Simon Johnson, and James A. Robinson found that a country that switches to democracy from a nondemocratic system sees its GDP rise by about 20% per capita over roughly the next 30 years.
“These are large but not implausible effects and suggest that the global rise in democracy over the past 50 years (of over 30 percentage points) has yielded roughly 6% higher world GDP,” Acemoğlu wrote.
These Nobel laureates identified a pivotal element of economic growth was whether those institutions were “extractive” or “inclusive.” Inclusive institutions – including issues like protection of economic and political rights, respect for rule of law, and preservation of property rights – helped produce societies that were prosperous over the long term. In extractive ones – benefiting only a small group of leaders or the ruling class – economic growth was hindered.
Similar findings from political scientist Carl Henrik Knutsen show that democracy provides a positive and better environment for economic growth, debunking the myths that autocrats are more effective at driving growth simply because of their tight grip on all elements of power. He argues that the market responsiveness in a democracy enhances growth and that autocracies often exaggerate their economic performance through reporting biased data. He also notes that democracy functions as a type of safety net protecting against adverse impacts – and that democracies are more successful in avoiding the worst possible economic outcomes, making them a safer proposition for both investors and the citizens of the country.
Democracies have also outperformed autocracies for quite some time, Knutsen argues. His 2021 study showed that average per-capita GDP growth “has been higher in democracies than in autocracies” from 1800 to the present, with the exception of the “turbulent period” of 1900 to 1939: “For instance, mean GDP per-capita growth was twice as high in democracies compared to autocracies between 1970 and 1989.”
Unpacking why democracies are more reliable
For American businesses working around the world, democracies provide a more reliable, stable, and open market environment than partially democratic or undemocratic governments. As Nobel laureates Acemoğlu, Johnson, and Robinson have written democracy spurs growth “by increasing investment, encouraging economic reforms, improving the provision of schooling and health care, and reducing social unrest.”
Democracies have rule of law and follow a clear set of rules that govern actions, including contract enforcement and business negotiations. Regulations are managed by a transparent accountable government. Violations of laws or regulations are effectively adjudicated through courts that operate fairly, according to the law, and are capable of enforcing contracts and dealing with breaches. In contrast, autocratic governments can make arbitrary decisions based on the interest of the leader. This increases the operational, financial, and legal risks of any company. Courts are not fully independent, which means investors do not have the benefit of impartial arbitration. Businesses are at greater risk of having assets seized, contracts canceled, or unexpected tax increases.
Democracies have more predictable and beneficial regulatory environments for American businesses. There is “a strong correlation between declining democracy and worsening regulatory environments, which (leaves) multinational businesses exposed to greater unpredictability in an ever-increasing number of countries,” according to global risk intelligence firm Maplecroft, which produces an annual Political Risk Dataset.
Maplecroft has flagged this worsening regulatory environment as a major concern for American businesses operating abroad. About 30% of the world’s GDP “is concentrated in countries categorized as high or very high risk” on Maplecroft’s Democratic Governance Index, it notes. “Given the relationship between the two issues, it is not surprising that two-thirds of chief economists surveyed by the World Economic Forum for its May 2024 outlook cited the regulatory environment as a key driver of decision-making in the year ahead.”
Democracies – by and large – – have a more educated and healthier workforce than autocracies do. Democracies invest more systematically in public goods, including education, health, and infrastructure, therefore providing foreign companies with a more productive operating environment. Democracies manage growth better and are able to provide more services to companies and workers.
While corporations understandably seek lower labor costs in other countries, there are significant risks when those decreased costs are accompanied by violations of labor standards. Autocracies have fewer protections for worker rights and fewer guards against exploitation and trafficking. This means supply chains in these countries are often fraught with abuse and violations of labor laws or internationally-recognized human rights standards. Democracies offer a more certain environment for American businesses that seek to avoid labor abuse for ethical and reputational reasons.
Democracies are more stable and have less social unrest and fewer security problems. While democracies are not free of disruptions, including protests or strikes, such challenges to the system and contests of power are handled through political institutions rather than violence or messy power struggles, allowing for peaceful and quicker resolutions. Maplecroft notes that democratic mechanisms are designed strengthen trust in the system and reduce the risk of political instability, increasing “transparency in government decision-making” and reducing “regulatory uncertainty and volatility to stimulate investment.”
Many of the factors that negatively impact economic growth, such as corruption or brain drain, are more prevalent in autocratic countries than in democracies.
Transparency International’s Corruption Perception Index (CPI), released in early 2025, highlights the direct correlation between regime type and corruption. The report notes “the stark contrast between nations with strong, independent institutions and free, fair elections, and those with repressive authoritarian regimes.”
On a 100-point scale measuring perceived levels of public sector corruption – with 100 being the best – “full democracies have a CPI average of 73, while flawed democracies average 47 and nondemocratic regimes just 33,” the report states. “This highlights that although some nondemocratic countries might be perceived as managing certain forms of corruption, the broader picture shows that democracy and strong institutions are crucial for combatting corruption fully and effectively.”
Similarly, autocrats accelerate brain drain by limiting the freedom of expression, speech, and creative pursuits of those who are not aligned with the regime. While many democracies have benefitted from the “brain gain” of foreign experts coming to their nations, this leaves others with fewer experts in country capable of driving growth, innovation, and professional culture.
Invest in democracy
Democracies not only offer better operating environments for businesses but also provide better investment opportunities. Some investment firms are increasingly factoring in the heightened risk caused by exposure to autocratic countries and eliminating all or some of the connection to these countries. This exposure could be directly from companies based in those countries or more indirectly from supply chains that run through autocratic nations.
Weak investor protections in autocratic countries make such investments riskier than those in democratic nations. Autocracies largely have more volatile stock markets that result in lower levels of protection for investors. They are also often characterized by corruption, lack of rule of law, and state-driven decision-making, all negative factors for investors. Morningstar Chief Markets Editor Tom Lauricella argues that those investing in stock markets in autocratic countries must factor in geopolitical risk and rule of law, two factors that make these markets dangerous and less profitable.
“When it comes to investing in autocratic countries such as Russia, the normal rules of picking stocks and bonds … can be rendered irrelevant overnight,” he said. While “investors might make money for a while … all that matters are the rules set by the person running the country.”
The International Monetary Fund has looked specifically at the impact of social unrest on stock markets, examining over 150 cases globally over a 10-year period. IMF experts Philip Barrett and Sophia Chen found that “in countries with more open and democratic institutions, social unrest events have a negligible impact on stock market returns. But in countries with more authoritarian regimes, the effect is large and negative: On average, stock market returns fall by 2% within three days, and by about 4% in the following month.”
Democracies provide more economic freedom, which allows for stronger respect for property rights, which sets the economic conditions for long-term sustainable growth and better market outcomes. The open legal and regulatory environments also make investment more secure and profitable.
Current events make clear the distinction between investing in democracies and autocracies. Wealth Briefing Group Editor Tom Burroughes commented that, “Considering how Russia’s invasion of Ukraine shocked the world, slamming markets in the process, and how mainland China’s moves against certain sectors two years ago wrongfooted advisors, autocracy risk is no mere academic concern.”
Russia’s unprovoked full-scale war in Ukraine, launched in 2023, has inflicted significant cost to the nation and businesses connected to the country. Yale School of Management’s Chief Executive Leadership Institute has closely tracked the number of businesses that have chosen to retreat from the Russian market, taking steps above and beyond those required by the sanctions levied against Russia. Between Russia’s invasion of Ukraine and September 2025, 1,028 international businesses have left Russia, the institute estimates. They left not simply for moral grounds but also because the opportunity for growth and wealth creation collapsed in the increasingly autocratic Russian society. Companies that have left Russia due to its invasion of Ukraine have lost more than $240 billion due to the retreat, according to Wealth Briefing.
China also presents an unstable investment climate, despite its economic growth, Perth Tolle, the founder and CEO of Life + Liberty Indexes and the creator of The Freedom 100 EM Index, outlined in a 2022 Barron’s article. There are four reasons why investment in such markets is ill-advised, Tolle said: Autocratic governments can misplace priorities, elevating state interests over market and stakeholder interests. They can make unchecked decisions that eliminate shareholder value quickly. Companies in these nations lack transparent ownership structures, with little accountability, due to the poor rule of law. Finally, companies in these countries also lack international oversight and sufficient accounting standards.
French investment firm TOBAM has developed a fund which minimizes the “autocracy risk” protecting investors from the negative direct and indirect impact related to autocracies. In developing the LBRTY All World Equity Index, CEO Yves Choueifaty asserted that sustainable economic prosperity requires solid democratic institutions:
The rules are never fair for citizens or businesses in autocracies because the dictator is above the law and there are no checks and balances from other branches of government. That creates an environment in which corruption and bribery are necessary to gain access to the ruler and either win his favor or avoid his wrath. It also means that economic policies are uncertain and can shift overnight based on the autocrat’s whims. Such uncertainty increases market volatility and reduces the equity valuations investors should be willing to pay.
Other firms have chosen to eliminate some – albeit not all – investment in autocratically governed countries, also recognizing the dangers these markets and supply chains present. In a recent Barrons article, Andrew Foster of Seafarer Overseas Growth and Income fund, said that his firm does not exclude all autocratic countries but certainly looks “for high-quality stocks that are least exposed to autocratic control.”
Indirect exposure to autocracy is not limited to supply chains and stock markets. It is also evident when there is significant dependence on capital and consumers that are based in autocracies.
Referencing the significant growth in funds that minimize the autocracy risk, Wealth Briefing Group’s Burroughes notes that away “from all the number crunching appears to be a simple truth, which is that if you want to grow wealth over the long term, freedom and the rule of law work far better than authoritarian regimes. It’s an insight as old as recorded history, but it is good to see it validated in hard numbers.”
But what about China?
The democracy-economic growth argument is frequently challenged by the fact that China has experienced rapid economic growth, market expansion and poverty alleviation, all under an autocratic government. This growth can be attributed to China’s shift from a centralized economy to one open to market forces, as well as China’s size and access to a huge labor force, unlike most other countries. But this does not fully address whether China breaks the democracy-economic growth model. China’s rapid expansion is also due in part to the significant exploitation of labor markets and control of political and economic rights. China’s economic growth has shown significant cracks and is now slowing.
Chinese President Xi Jinping’s increasing crackdown on institutions and civil society have made the economic climate in China far more unpredictable and unfriendly for international business. He has also prioritized political control over market growth. Arthur Kroeber, Founding Partner and Head of Research at Gavekal Dragonomics, has highlighted the tension between the illiberal political control and the fast-growing market-based system, noting “the ability of China to continue balancing between an authoritarian political system and a capitalist economic system. The political system has become much more authoritarian and much more personalized under Xi Jinping.”
Likewise, Xi’s campaign against corruption has been unsuccessful, resulting in a massive targeting of political opponents and little reduction in corruption. In fact, the U.S. Office of the Director of National Intelligence released a report in 2025 assessing the endemic corruption and how a closed, highly centralized, nontransparent system has enabled – not countered – this widespread problem.
Autocratic governance, particularly under Xi, is a significant factor in the economic challenges which China faces today. While its huge consumer market understandably remains a strong draw for many international businesses, these corporations must contend with the very real impact of the Chinese Communist Party’s control on the volatility and openness of the Chinese market.
So what now?
The U.S. government and American corporations cannot be neutral on the quality of governance globally and the impact on American economic growth. It matters to our economic growth whether most governments around the world are democracies or autocracies.
U.S. Chamber Foundation President Michael Carney called on the United States government and business community to recognize the connection between global democratic governance and our national well-being: “It is essential for the world’s democracies to educate their people about the importance of self-government to our continued peace and prosperity. And it is just as important for business leaders to defend the long-term health of democratic governments and the ideals they represent.”
Both the U.S. government and the American business community must consider how they can foster this democracy-growth nexus without overextending their scope. The business community cannot and should not serve as a development agency or a democracy nonprofit, but it also should not be a disinterested actor disconnected from democratization globally. The U.S. government should not shy away from supporting those who are pushing for democratization and market openings around the world, although it cannot exert undue control over foreign political or economic developments.
There are several steps that the U.S. business community can take:
First, prioritize democracies for business operations and investment. While there may be some short-term gains in countries with nondemocratic governments, the long-term gains of investing in democracies are reason enough for American businesses to concentrate on working with and in democracies. This is not only beneficial to American companies, but also creates the long-term incentive for governments to strengthen democracy to attract American business. This would result in more markets for American corporations. Businesses should also review their large pension plans and endowments that include publicly traded stocks in companies listed in China, Russia, and other autocratic countries.
Second, support democracy work overseas. American businesses have a long history of doing this based on an understanding of the government-business relationship and the importance of democracy to the foreign policy interests of the United States, the U.S. Chamber Foundation’s Carney notes. Organizations like the Center for International Private Enterprise (CIPE) – which supports democratic environments for economic growth by countering corruption, kleptocracy, and state capture – deserve support, particularly from those who benefit directly from this work. Carney notes that CIPE grew out of U.S. government funding for private enterprise development programs of the U.S. Chamber Foundation in 1983.
Third, bring business innovation to democracy support. Several corporations have made supporting democracy a part of their work. Notably, Jigsaw, a technology incubator and subsidiary of Google, supports democratic work around the world, using its innovative technology. Partnerships between democracy experts and businesses have the potential to yield transformative change for democracy advocates – and ultimately freer societies and markets.
Finally, use the power businesses already have. American businesses can make a difference by simply acting according to democratic principles. American businesses are powerful forces and voices in any country where they invest. Their mere presence and voice make an impact representing democratic values in the countries in which they work. Decisions they have made to adhere to democratic standards, the rule of (democratic!) law, and anticorruption have been transformative.
But this is not just the work of American businesses. The U.S. government has an important role to play in supporting democratization globally, not only because it is aligned with our values but also to reinforce American business and security interests. The Trump Administration’s decision to significantly decrease U.S. government democracy support for other countries and retreat from a foreign policy anchored in democratic values has left a significant gap in bolstering governance and engaging governments overseas. This has hurt American leadership globally. The resulting gap is being filled by China, which is naturally tilting governance support away from democracy and toward reliance on the Chinese Communist Party.
Russia and China are actively seeking to undermine American democracy, its global leadership, and its economic dominance. Because the lure of the Chinese market in particular is great, American economic policy must ensure that it accelerates American growth while guarding against aiding economic growth in a nation that has a clear strategic interest in undermining the United States.
The United States should prioritize economic relations with democratic nations, not only to fuel American economic growth but also to contain China’s economic growth and efforts to unseat the United States. America’s autocratic adversaries coordinate well to counter American power; the United States should do the same with democratic allies. The Select Committee on the CCP released a clear set of recommendations to counter China’s economic agenda that lays out a compelling roadmap to assert American leadership in this area.
As the administration and Congress consider how to help American markets thrive, they would be well advised to also expand support for democracy globally. They need not mirror previous programming, particularly in light of the administration’s stated concerns about prior approaches. But they cannot allow prior shortcomings – whether perceived or real – to take the United States out of the democracy support game completely. Doing so would undermine the United States’ role as leader of the free world and minimize the benefits that democracy has on our national security. At the same time, it would diminish the possible benefits for our economic growth.
Growing the American economy is essential to the American people. We should use all the tools possible to allow our economy to thrive. Supporting democratization globally should be a part of that effort.
