Political Investment Cycles in Democracies and Autocracies

Extant research has shown considerable interest in whether host countries’ political uncertainty impedes foreign direct investment (FDI). Building upon the scholarly consensus on the adverse impact of political uncertainty on FDI, this article demonstrates that the extent to which investment climates are unpredictable varies cyclically, on the basis of election timing in democracies and leadership turnover in autocracies. The empirical results show that in presidential democracies, FDI tends to slowly increase after an executive election and then decline as the next executive election nears. However, I find that an electoral investment cycle is not found in parliamentary democracies where election timing is irregular, less predictable, and endogenous to domestic economic conditions. I also find that a similar political investment cycle exists in autocracies not through electoral cycle but through leadership tenure cycle. The level of FDI inflows tends to be relatively low early in autocrats’ tenure when political uncertainty is high and rise as autocratic leadership tenure increases over time but eventually wane again as autocratic leadership is destabilized in the late period of power transition. The findings indicate the existence of heterogeneous political investment cycles, depending on regime type.     

The Political Enforcement of Liberalism: Bargaining, Institutions, and Auto Multinationals in Hungary

The demise of communism triggered large flows of foreign direct investment into Eastern Europe. This article examines the impact of recent changes in the international environment—the transformation of world production systems and the rise of neoliberalism—on bargaining between multinational corporations and post-communist governments. It focuses on the Hungarian automobile industry, one of the region's largest recipients of FDI. The Hungarian case illustrates the ability of small, open, and geopolitically weak states to parlay shifts in the global environment into a bargaining asset. The ascent of lean production heightened pressure on auto MNCs to develop local supplier systems capable of fast delivery of components to East European subsidiaries. The pull of backward integration was particularly strong for Japanese producers, whose non-European status enabled Hungarian state authorities to secure commitments to raising domestic content. Transplanting Japanese-style production in Eastern Europe proved less vexing for European MNCs, whose status as EU-based companies freed them of local-content requirements and whose preexisting supplier networks obviated heavy investments in the Hungarian components industry. But while Western auto producers enjoyed highly favorable terms of entry into Eastern Europe, even they could not elude the paradoxical effects of global changes on MNC/host state relations. The very eastward extension of the European Union's nondiscriminatory rules that facilitated EU-based firms' entry into Hungary also permitted host state authorities to parry efforts by MNCs to obtain particularistic concessions after entry. The Hungarian case thus demonstrates that MNC/host state bargaining in the post–Cold War period hinges more on the global positions of multinationals than on the structural vulnerabilities of capital-importing states ( per dependency theory) or the internal capacity of host states ( per statist theories).     

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.     

Impact of Political Risk on FDI Revisited—An Aggregate Firm-Level Analysis

Unlike previous studies on political risk and foreign direct investment (FDI) that used macro-level FDI data to test micro-level theories, I make use of aggregate data on U.S. firms' investment activities in 101 developing countries during the period 1997–2007 to reassess the propositions. Using a multilevel mixed-effects linear instrumental variable approach, I find that lower political risk is associated with (a) an increase in U.S. firms with equity stake of 51% and above, (b) a higher proportion of fixed assets, and (c) an increase in the return on investments, after controlling for a host of relevant factors. Further analysis reveals the relationship is also strong with respect to investments in total assets and sales. The results are robust to alternative data, instruments, and estimation techniques. These results bring to fore the multiple risk hedging strategies available for foreign firms operating in high risk environments.     

States Sued: Democracy,the Rule of Law,and Investor-State Dispute Settlement (ISDS)

Investor-state dispute settlement (ISDS) cases have increased dramatically in recent decades, and the institutions of investment arbitration to resolve investor-state disputes constitute the core of the modern investment regime. In this article, we seek to explain the variation in the host governments’ risk of being challenged by foreign investors before international arbitration tribunals. We argue that such risk is greatest at the intermediate level of democracy where some democratic elements such as elections are strong, but the system of rule of law remains weak. In those regimes, “regulatory risk” runs higher than in autocratic regimes as the host governments are under greater pressure for regulating matters of broad public concern. At the same time, more traditional political risk of arbitrary, discriminate, and abusive acts remains considerable at that level of democracy due to weak rule of law, exacerbating the former risk. Empirical analysis provides a good deal of support for the argument.     

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.     

Improving Reputation BIT by BIT: Bilateral Investment Treaties and Foreign Accountability

The literature on foreign direct investment (FDI) has paid an increasing interest to international institutions such as bilateral investment treaties (BITs), but whether BITs help attract FDI is an unsettled question. Building on the existing literature, this article argues that BITs can change investors’ perceptions and the corresponding investment they make because signing BITs signals the involvement of another powerful country that is able to compel the host government to comply. This implies that the effect of BITs is not constant across signatory countries: BITs are more effective when they are signed with rich and influential countries. Using monadic and dyadic FDI data, this article finds that BITs signed with powerful countries (defined as the top six largest economies) lead to an increase in FDI inflows (both from these signatory countries and from other countries). BITs signed with other countries, despite in a larger quantity, have little influence on FDI inflows.     

Conditional on Conditionality: IMF Program Design and Foreign Direct Investment

The article explores how International Monetary Fund (IMF) program design influences foreign direct investment inflows. The author argues that stricter IMF conditionality signals a program-participating government's commitment to economic reforms, as it incurs larger ex ante political cost and risks greater ex post political cost. Thus, the catalytic effect of an IMF program is conditional on conditionality: programs with stricter conditions catalyze more foreign direct investment than those with less stringent conditions. Empirical analysis of the IMF conditionality dataset supports the argument and shows that after accounting for IMF program participation, the more structural conditions included in an IMF program, the more foreign direct investment flows into the country.     

Chinese influence,U.S. linkages,or neither? Comparing regime changes in Myanmar and Thailand

This study examines the potential influence of foreign linkages on regime outcomes by comparing Myanmar and Thailand. Linkages with the West are supposed to facilitate democratization, whereas those with autocracies usually promote regime survival. This study focuses on Myanmar and Thailand’s linkages with the U.S. and China, which at first sight seem to demonstrate the hypothesized effects. Myanmar gradually liberalized while strengthening its Western linkages, whereas Thailand experienced democratic breakdown amid a shift in alignment from the U.S. to China. However, in-depth analysis suggests that the influence of foreign linkages on domestic political change was minimal and that the relationship may very well be endogenous. The findings of this study call for a more careful theorization and handling of the external factors in studies of regime change and highlight the importance of simultaneously analyzing democratic and autocratic linkages.     

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.     

Foreign direct investment and the risk of regime transition in autocracies

Economic globalization and, in particular, foreign direct investment (FDI) have often been considered to be catalysts for economic reform and political liberalization. It is argued that openness to foreign investment spurs democratization by empowering pro-liberalization actors and undermining elite cohesion. This article explores and tests three alternative hypotheses linking FDI and autocratic regime survival. The liberalization hypothesis claims that FDI promotes democratization. The state-capture hypothesis suggests that FDI, by increasing the value of power, may raise the risk of an autocratic transition. Lastly, the stabilization hypothesis, contrary to the first two, claims that FDI can enhance dictatorships’ stability by opening new opportunities for distributing benefits to regime elites. The empirical analysis, covering about 100 countries for the time period 1970–2008, uses data on autocratic breakdowns and transition types to test the above hypotheses. The reported evidence does not support the liberalization or the state-capture hypothesis. FDI is found to reduce the likelihood of democratic transitions.     

Can I stay a BIT longer? The effect of bilateral investment treaties on political survival

Bilateral Investment Treaties (BITs) have proliferated throughout the international system. While ostensibly commercial in purpose, do BITs have domestic political ramifications? I argue that BITs affect a leader’s tenure through their effect on the property rights environment in developing countries. BITs, by segmenting a country’s property rights environment for foreign and domestic firms, reduce the incentive for foreign firms to lobby for property rights protections in the host country thus leading to a stagnating domestic property rights environment. In autocracies, a stagnating domestic property rights regime benefits domestic business elites who can continue to stymie small and medium enterprises (SMEs). The political benefits of BITs, however, decrease as a country becomes more democratic. Using a dataset of developing country leaders over the period 1965-2011, I find support for my hypothesis that BITs are associated with a decreased hazard of losing office and that the effect diminishes with higher levels of democracy. My results highlight the consequences of the legalization of global investment on the domestic political economy.     

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.     

Money with a Mean Streak? Foreign Economic Penetration and Government Respect for Human Rights in Developing Countries

This study examines the relationship between foreign economic capital and the level of government respect for two types of human rights in developing countries. Two opposing schools of thought offer explanations as to what this relationship might be like. According to the liberal neoclassical school, the acceptance of liberal economic doctrine will provide positive political benefits to developing countries. The "dependency" school, on the other hand, argues that because ties between core and periphery elites give governments in developing nations an incentive to repress, human rights conditions will worsen as foreign economic penetration increases. The results of previous empirical queries into this matter have been mixed. In contrast to most studies, we focus on a broader measure of foreign economic capital, including foreign direct investment, portfolio investment, debt, and official development assistance. Using ordered logit analysis on a cross-national sample of forty-three developing countries from 1981 to 1995, we discover systematic evidence of an association between foreign economic penetration and government respect for two types of human rights, physical integrity rights and political rights and civil liberties. Of particular interest is the finding that both foreign direct investment and portfolio investment are reliably associated with increased government respect for human rights.     

Learning and the Precision of International Investment Agreements

The international regime for the promotion and protection of foreign investment consists of a multitude of close to 3,000 bilateral investment treaties (BITs) and related international investment agreements (IIAs). Yet, despite a growing body of research on IIAs, scholars in political economy have paid little attention to the legal language in the treaties themselves. In this research note, we draw on the conceptual apparatus of the legalization literature and focus on legal precision in BITs. We use a new data set created through quantitative text analysis to develop an index measuring legal precision. We then investigate the causes of the pronounced increase in precision in BITs and the considerable variation across treaties. We argue that capital-exporting countries are the primary drivers of change, and that they are motivated because they learn the implications of existing legal language from two sources: First, from the growing number of arbitration proceedings, and second, when they themselves are targeted by such claims. We provide statistical tests of our hypotheses and find ample support.     

Economic Policy,Political Constraints,and Foreign Direct Investment in Developing Countries

As foreign direct investment (FDI) has become increasingly important in the world economy, a large body of literature has emerged regarding the determinants of FDI flows. Some scholars argue that democracy attracts FDI through the mechanism of political constraints, which reduce the risk of negative policy changes. However, the value of policy stability should be conditional on the attractiveness of contemporary FDI-relevant policies. I therefore propose a theoretically more comprehensive argument: political constraints are attractive to investors when the host country policy environment is FDI-friendly, because these political constraints reduce the probability of negative policy changes in the future. When the policy environment is hostile to FDI, on the other hand, political constraints will have little positive effect, and, to the extent they indicate that FDI-relevant policies are unlikely to improve, may even deter FDI. This argument helps explain why the positive relationship between democracy and FDI seems to emerge after a global shift toward FDI-friendly polices. I find robust empirical support for the argument in tests covering more than 100 developing countries from 1970 to 2014, indicating significant effects using a variety of policy and political constraint measures.     

The Catalytic Effect of IMF Lending: Evidence from Sectoral FDI Data

Our study contributes to the search for the elusive catalytic effect of International Monetary Fund (IMF) lending on inflows of foreign direct investment (FDI). Recent scholarship has found that the catalytic effect is conditional on political regime and program stringency. We contribute to this literature by developing and testing a theory which describes how the catalytic effect also varies by economic sector. This is a departure from existing studies, which have tended to focus on aggregate FDI flows after crises. Our findings corroborate previous research, which finds that in general IMF lending has a substantial and negative effect on FDI. However, we find that the negative effect is concentrated in sectors that are highly dependent on external capital and have low sunk costs in the host country. Our findings are robust to several alternative explanations common in IMF literature, namely the importance of IMF program design and the ability of governments to make credible commitments to reform. Substantively, our findings suggest that investors are more likely to use IMF lending as an escape hatch in countries where FDI is dependent on external capital and has low sunk costs.     

Internationalized regimes: a second dimension of regime hybridity

Traditional approaches have conceptualized political regimes almost exclusively with reference to domestic-level political factors. However, many current and historical political regimes have entailed a major role for international actors, and in some cases the external influence has been so great that regimes have become internationalized. This article explores the concept of ‘internationalized regimes’ and argues that they should be seen as a distinct form of hybrid regime type that demonstrates a distinct dimension of hybridity. Until now, regime hybridity has been conceived along a single dimension of domestic politics: the level of competitiveness. Yet, some regimes are characterized by a different type of hybridity, in which domestic and international authority are found together within a single political system. The article explores the dynamics of internationalized regimes within three settings, those of international occupation, international administration and informal empire.     

Credibility and Flexibility: Political Institutions,Governance, and Foreign Direct Investment

This article argues that the relationship between political institutions and foreign direct investment is both nonlinear and conditional upon status quo policies. The empirical analysis demonstrates an inverted U-shaped relationship between political institutions and foreign direct investment in developing countries, with four veto players being the most attractive institutional arrangement. Countries with too few or too many veto players are not favored because of either high policy uncertainty or high policy rigidity. In addition, the benefits and costs of credibility and flexibility vary in good times and hard times. The benefits of maintaining status quo tend to outweigh the costs in countries with good initial regulatory environment. The costs of maintaining status quo tend to outweigh the benefits when countries are more vulnerable to exogenous shocks.     

Unionization and Restrictions on Foreign Direct Investment

Although inward foreign direct investment (FDI) has many benefits for a country as a whole, like trade, it is a source of competition for producers in the host country, with concomitant effects on labor markets. The entrance of foreign multinationals increases demand for skilled labor at the expense of unskilled labor, and also increases the elasticity of demand for labor because multinationals are able to shift production across borders. This raises the question of whether or not labor has an impact on policy toward inward FDI. I suggest that organized labor is a key determinant of the influence of labor on inward FDI restrictions. Not only do unions mitigate the collective action problem facing labor, but unionized workers, regardless of skill level, have incentives to support restrictions on inward FDI because rising elasticity of demand restricts bargaining power. I expect that higher levels of unionization will lead to greater restrictions on inward FDI. I find support for this hypothesis in an analysis of U.S. industry-level formal restrictions on inward FDI between 1981 and 2000. Industry skill intensity, a proxy for the distributional consequences of FDI for labor, does not explain variation in barriers to inward FDI, suggesting that the confluence of interests and influence is necessary for labor to influence policy.