The Politics of Foreign Direct Investment in Authoritarian Regimes

While political scientists find that democracy reduces political risk, little scholarship analyzes how authoritarian regimes attract foreign direct investment (FDI). This article argues that while authoritarian countries are generally risky, this risk can be minimized when authoritarian regimes are constrained from both “above” and “below.” Signing international investment treaties are critical for authoritarian countries to signal a commitment to FDI-friendly policies. However, only authoritarian signatories that allow some degree of public deliberation in their policymaking are then constrained from deviating from the policies of the international investment treaties. Panel statistical regressions and a case analysis support the hypothesis.     

Political institutions and FDI inflows in autocratic countries*

ABSTRACT

Why do some autocratic countries attract more foreign direct investment (FDI) than others? Surprisingly, few studies have explored the considerable variation in FDI inflows to non-democratic countries. In this article, I argue that non-democratic countries with seemingly democratic political institutions, such as elected legislatures, attract more FDI inflow than others. This is because these institutions can (1) reduce the transaction costs of investment activities due to the relative transparency of the policy-making process, and (2) act as veto players, making the existing market-friendly policy changes difficult, and thus, promising a more stable investment environment. My empirical results support the main expectation that autocratic countries with legislatures attract more FDI than other autocratic countries, and the institutions’ effects are conditionally modified by the quality of market protecting institutions.     

Investors,turbulence, and transition: Democratic transition and foreign direct investment in nineteen developing countries

Do profit‐seeking foreign direct investors value a country's transition to democracy? If they do, they should vote with their pocketbooks, resulting in a post‐transition increase in foreign direct investment flows. This study attempts to uncover links between transition to democracy and foreign direct investment (FDI) in Asia, Latin America, and the Caribbean, In doing so, it addresses existing arguments about connections between democracy and investor behavior. The regions examined have not only experienced democratic transitions, they also account for the majority of the increasing flow of FDI to the developing world. This research employs time‐series cross‐sectional (TSCS) economic and political data, using ordinary least squares with panel corrected standard errors. The central finding is that transition to democracy has a negative effect on FDI. Secondarily, political instability and higher levels of democracy also deter foreign direct investors.     

Development and political legitimacy: the cases of Iraq and Afghanistan

Development's policies are based on a set of premises: state‐building, state of law, democratisation, accountability and privatisation. The idea is that the Western concept of democracy could be implemented through the development of a ‘civil society’ of the building from scratch of new institutions. Such a model works when there is political will from the local political authorities and the society to adopt such a model (as was the case in Poland and Hungary after the collapse of the Soviet Union). But in any case a policy of development should be based on political legitimacy. In Iraq, as well as Afghanistan, political legitimacy means abiding with nationalism, Islam and local political culture (often based on clan‐ism and networks). In Iraq, the US policy has deliberately ignored the issue of legitimacy. In Afghanistan, because the US intervention was not part of a great design, it relied more on local constraints and thus has been more effective, or at least, less disruptive. The issue is not opposing a Western model of democracy to a national authoritarian political culture, but to root democracy into the local political culture. If not the policy of strengthening civil society, through political and military pressure as well as NGO's, has a disruptive effect and may lead to a conservative, nationalist and religious backlash.     

Campaigning for Capital: Fair Elections and Foreign Investment in Comparative Perspective

This article makes several contributions to the literature on political risk and the determinants of capital inflows. First, I clarify the relationship between capital flows and democracy’s constituent parts in a way that takes arguments beyond aggregate democracy indicators and static political institutional structures. Specifically, I argue that fair elections signal government respect for democracy and the rule of law in a highly visible manner investors can access. I show how investors therefore use the fairness of elections as a way to assess political risk and to inform their investment strategies. However, the type of investment and the kinds of evidence of electoral misbehavior condition elections’ influence on capital flows. I also disaggregate capital flows into foreign direct investment (FDI) and portfolio investment. I argue that the logic of investing is different in the short term (portfolio) versus the long term (FDI). When it comes to political risk, I provide evidence that portfolio investment is much more sensitive to risk factors than FDI because of the relative ease with which portfolio investors can extricate themselves from an increasingly risky market and seek safer returns elsewhere compared to direct investors.     

Post-civil war democratization: promotion of democracy in post-civil war states, 1946–2005

Post-civil war democratization is a critical element of building sustainable peace in post-civil war states. Yet studies of democratic transition and survival suggest that the post-civil war environment is not hospitable to either the transition toward or the survival of democracy. This inhospitality may be due to the fact that post-civil war environments are contentious. After a civil war, the former protagonists fear for their security and also want to protect their political and economic interests. The central argument of this study is that former rivals can agree to a transition toward democracy to the extent that a stable balance of power exists between the government and rebel groups; a balance that eliminates the sort of security dilemma that would encourage one or both parties to resume armed conflict. Such a balance should ensure access to political power and economic resources. This study identifies factors that contribute to the establishment of a balance of power between former protagonists and factors that affect its stability. The presence of these factors should affect the decision of former protagonists on whether or not they can achieve their political and economic interests if they agree to a transition toward democracy once the civil war ends. Based on this theoretical argument, I have derived empirically testable hypotheses. In the survival analysis performed, I find support for the theoretical arguments. The findings of this study have some policy implications.     

Federal Institutions and Multinational Investors: Federalism,Government Credibility,and Foreign Direct Investment

Political risk is an important factor in the decision to invest abroad. While the investment potential might be lucrative, there is always the risk that the host government will expropriate the profits and assets of the foreign investor. Political institutions, however, can serve as constraints on the actions of political actors in the host country. We argue that federal structures lower political risk. Joint-reputational accountability in overlapping political jurisdictions increases the likelihood that investment contracts will be honored. Empirical analyses of cross-sectional time-series data for 115 countries, from 1975–1995, are used to study how political institutions affect foreign direct investment (FDI) flows. After controlling for the effect of relevant economic and political variables, we find that both democratic and federal institutions help attract FDI, although the additive effect of democracy and federalism is small. This is not surprising; democratic systems already have low political risk; they do not need the additional credibility that the federal system provides to attract FDI. In contrast, we expect that federal structures significantly improve the trustworthiness of less democratic states. Empirically, we find that less democratic countries with federal political systems attract some of the highest levels of FDI.     

Labor migration numbers and rights: do they trade off or advance together?

This article reconsiders the argument that as labor immigration policy opens, it must also become more restrictive in terms of immigrant rights. After discussing this tradeoff logic, positing a negative relationship between external (numbers) and internal (rights) labor migration policy, it then extends the underlying political model to show that when accounting for the lobbying pressure of firms seeking high skill labor, a very different expectation emerges. This political accommodation argument predicts a positive relationship between external and internal migration policy, or that policy related to labor immigration openness and immigrant rights should advance together, although not necessarily quickly or at the same rate. It then tests these competing propositions using a new dataset that sorts labor migration policy changes among 38 advanced industrial democracies from 1995 to 2016 into these two dimensions, finding a significant positive relationship between them.     

News,Talk, Opinion,Participation: The Part Played by Conversation in Deliberative Democracy

Deliberative democracy can be defined as a political system based on citizens' free discussion of public issues. While most scholars have discussed deliberative democracy normatively, this study attempts to test the validity of a model of deliberative democracy through examining the interrelationships among its four components: newsmedia use, political conversation, opinion formation, and political participation. Sufficient empirical evidence was found to support the hypotheses that (a) news-media use is closely associated with the frequency of political conversation in daily life both at general and issue-specific levels; (b) willingness to argue with those who have different opinions is influenced by majority perceptions and by news-media use and political talk; (c) news-media use and political conversation have positive effects on certain measures of the quality of opinions (argument quality, consideredness, and opinionation) and perhaps on opinion consistency; and (d) news-media use and political conversation are closely associated also with participatory activities, but more so with "campaigning" than "complaining."     

Political Freedom, Political Instability, and Policy Uncertainty: A Study of Political Institutions and Private Investment in Developing Countries

This paper examines whether democracy and other major characteristics of political institutions have any significant consequences for private investment. I isolate three political determinants that may affect property rights and private investment: political freedom, political instability, and policy uncertainty. The major findings in this paper can be characterized as follows: Political freedom promotes private investment, particularly through the channel of improving human capital formation. Political instability, as measured by the variability of political freedom, has a negative effect on private investment. Finally, policy uncertainty, as measured by the variability of government capacity, adversely affects private investment. These findings have been tested rigorously through using variables controlling for both domestic and international conditions.     

Transatlantic Democracy Promotion and the Arab Spring

The Arab Awakening can be seen as a symptom of failure of US and EU democracy promotion policies in the region. By identifying democracy with ‘liberal democracy’ – a discursively powerful political move – the contingent character of democracy has been lost. The US and the EU, the main promoters of a neoliberal understanding of democracy, have sided with the wrong side of history. And because they have failed to deeply revise the philosophical underpinnings of their policies, even after 2011, they risk another, even bigger, policy failure.     

The Democracy Aid Calculus: Regimes,Political Opponents,and the Allocation of US Democracy Assistance, 1981–2009

To encourage the spread of democracy throughout the developing world, the United States provides targeted aid to governments, political parties, and other non-governmental groups and organizations. This study examines the calculations behind the allocation of democracy assistance, with special attention to the role of regime conditions and policy compatibility in the provision of aid. We argue that both concerns—the opportunity for successful democratization and critical goals related to containing and countering political opponents—are central to democracy aid allocations. We theorize how these two concerns determine the amount of aid allocated, operationalizing these concepts using measures of the original democracy level, change in the democracy level, and policy compatibility. We find support for our argument in tests of US democracy aid allocations by the US Agency for International Development (USAID) from 1981–2009.     

Liberalism,and the limits of pluralism

The primary aims of this article are (a) to examine the importance of cultural norms and what part they play in requiring us to tolerate others out of respect, and (b) to formulate some guidelines designed to prescribe boundaries to liberty and tolerance conducive to safeguard the rights of individuals and, in turn, democracy. I argue that a liberal democracy can interfere in the business of its sub‐cultures when some cultural norms subvert the basic principles upon which a liberal society is founded. I proceed by making a further radical claim that democracy may prevent cultural groups from entering society if their conceptions of the good essentially conflict with its norms. My basic argument is that considerations of context and intentions must be taken into account, and that they may require the introduction of constraints. I conclude by considering the question whether or not the intolerant group has any right to complain, arguing that it does not.1     

Security Threats,Enemy-Contingent Policies,and Economic Development in Dictatorships

In this article, I introduce, discuss, and formalize the argument that the type of security threat a dictatorial regime faces has implications for economic policy making and, consequently, economic outcomes. Dictators who mainly face internal threats often have incentives to conduct policies that are harmful to economic development, like underproviding productive public investment. However, dictators who mainly face external threats are more likely to conduct economic development–enhancing policies. The type of security threat facing a dictator thus contributes to explaining the large variation in economic development among dictatorships. The argument finds empirical support in cases from different geographical regions and historical periods. One particularly illustrative example, addressed in the article, is Japan in the nineteenth century, where the sharply increased severity of external threats from Western countries induced the selection of development-enhancing policies in the last half of the century.     

De-Democratisation and Rising Inequality: The Underlying Cause of a Worrying Trend

This article is concerned with the question of why economic inequality has increased so dramatically in recent decades and what can be done about it. It suggests that the fundamental cause of the recent rise in economic inequality, underlying all the more proximate factors, is a major process of de-democratisation that has taken place since the 1970s, which has increased the political representation of capital while reducing that of labour. The article pulls together a wide range of research from different disciplines in order to decisively show the ways in which economic governance has been de-democratised in this period. This analysis has important consequences with regard to policy attempts to reduce inequality and suggests that these must focus not on technical issues but on ways to strengthen democracy. And if the dynamics of de-democratisation are fundamentally global, then solutions must also be global. These conclusions are in stark contrast with current academic and policy approaches which tend to focus on technical, rather than political, solutions, and which focus overwhelmingly at the national, rather than the global, level. This article thus calls for a major rethinking of the causes of rising inequality and the policy changes needed to reduce it.     

Reversing Course: Fiscal Policy and Economic Interdependence

In response to the 2008 financial crisis, countries throughout the developed world widely embraced fiscal stimulus policies. But about one year later, with their economies still weak, a majority of these countries reversed course and adopted austerity measures, despite having the ability to maintain fiscal expansions. With little variation in domestic interests, institutions, or political ideologies over this short time period, theories of budgetary politics struggle to explain this policy shift. This shortcoming may be the result of the literature generally ignoring the international effects of fiscal policy. I argue that policymakers strategically consider their trade partners’ likely fiscal policies before setting domestic fiscal policy. If incumbents expect their major trade partners to enact fiscal expansions, they are more likely to pass expansionary policies of their own. But when incumbents expect their counterparts to enact contractionary policies, they are less likely to fund expansionary policies, as these policies may boost foreign economies with suppressed effects at home. I test this argument using spatial econometrics and a data set of OECD countries from 1998 to 2015. The evidence suggests that shifting expectations of fiscal policies abroad explains much of the move from stimulus to austerity over the short time span.     

Second Image Reversed Politics: Britain's Choice of Freer Trade or Imperial Preferences, 1903–1906, 1917–1923, 1930–1932

In 1903–1906, 1917–1923, and 1930–1932 British decision makers debated whether to adopt a system of imperial preferences. Preferences were rejected in 1906 and 1923, but adopted in 1932 at the Ottawa Conference. The existing political economy literature focuses primarily on the hegemon's position in the international system, state or society centered arguments, and the role of ideas and beliefs to explain changes in a hegemon's foreign commercial policy. Using a second image reversed argument, I contend that changes in the commercial composition of the emerging contenders from a mix of liberal and nonliberal contenders in the first and second periods (1903–1906; 1917–1923) to nonliberal contenders in the third period (1930–1932) strengthened economic nationalists over free traders, contributing to Britain's adoption of imperial preferences. Although greatly diminished in strength, free traders were able to moderate theprotectionist policies through the Ottawa Agreements and the Sterling Area.     

Ethnicity,political survival,and the exchange of nationalist foreign policy

How does leadership’s desire for political survival in ethnically heterogeneous democracies affect the probability of states exchanging nationalist foreign policy? I define nationalist foreign policy as foreign policy that aims to fulfill national self-governance using a civic or ethnic frame. I argue that civic-nationalist policy disputing the territoriality of one’s own state is more likely, while ethno-nationalist policy favoring the leadership’s foreign co-ethnics is less likely, when the size of the leadership’s ethnic group is small and the level of democracy is relatively high. This is because the leadership, under such domestic conditions, has to mobilize support from other ethnic groups in order to stay in power. Civic-nationalist policy allows the leadership to increase domestic solidarity across ethnic lines and mobilize support from other ethnic groups, whereas ethno-nationalist policy would risk other ethnic groups criticizing the leadership of being ethno-centrist. These hypotheses are supported by quantitative analysis using an original dataset.     

Good for some,bad for others: US investors and non-trade issues in preferential trade agreements

Preferential trade agreements (PTAs) trigger investment through their commitment to a liberal market economy. Increasingly however, PTAs go far beyond liberalizing trade and investment flows. Especially controversial features included in most modern PTAs are environmental and labor standards. Do these standards affect business activity? If so, how do investors react to such non-trade issues in trade deals? The literature provides inconclusive findings about the impact of standards on foreign direct investment (FDI). Some contributors argue that strict standards decrease FDI, whilst others claim that environmental and labor protection increases productivity and, in consequence, inward investment. In all likelihood, the usage of aggregated FDI data, as is the case for most studies, causes confusion. I expect standards to influence investors’ decisions – but heterogeneously across sectors. Environmental and labor standards should reduce FDI in polluting and low-skilled labor endowed industries, but increase investment in environmentally clean and high-skilled labor abundant sectors. Based on an original dataset of environmental and social standards in trade agreements and at the sector-level disaggregated US-FDI data, I find robust support for my argument. The paper provides a more nuanced picture on the standards and investment nexus: Standards have no uniform effect on multinationals. Instead, they are good for some, but bad for other industries.     

The ambivalence of populism: threat and corrective for democracy

Two images of populism are well-established: it is either labelled as a pathological political phenomenon, or it is regarded as the most authentic form of political representation. In this article I argue that it is more fruitful to categorize populism as an ambivalence that, depending on the case, may constitute a threat to or a corrective for democracy. Unfolding my argument, I offer a roadmap for the understanding of the diverse and usually conflicting approaches to studying the relation between populism and democracy. In particular, three main approaches are identified and discussed: the liberal, the radical and the minimal. I stress that the latter is the most promising of them for the study of the ambivalent relationship between populism and democracy. In fact, the minimal approach does not imply a specific concept of democracy, and facilitates the undertaking of cross-regional comparisons. This helps to recognize that populism interacts differently with the two dimensions of democracy that Robert Dahl distinguished: while populism might well represent a democratic corrective in terms of inclusiveness, it also might become a democratic threat concerning public contestation.