Political Risk, Democratic Institutions, and Foreign Direct Investment

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In this projectI attempt o disentangle hese
t
t
effects focus n therelationship
and
o
between olitical
p
rb
o
a
regimesnd political isk ydrawingn bothquantir
tative nd qualitativeesearchpproaches.pecifically,
a
a
S
f
I utilizecross-sectional collected rompolitical
data
t
risk nsurancegencies o testhowdomestic olitical
i
a
p
a
institutionsffect oliticalrisksfor multinational
p
I
this
w
investors.supplement quantitative
analysis ith
w
interviews ith multinational
investors,
qualitative
a
investment
location consultants,nd politicalrisk
I
insurers o justify ssumptions make in my statt
a
isticalanalysisand to furtherxplorethe microe
mechanismsfmyargument.he twomainfindings
o
T
i
lead
in thispaperare: (1) democraticnstitutions to
r
i
lowerlevelsof risk,and (2) thisempirical esult s
i
drivenby the constraintslaced on executivesn
p
democraticegimes.
r

on thelinkbetween olitical nstitutions
i
and
p
c
politicalrisksfacingmultinationalorporations (MNCs).1 Althoughthe 1960s and 1970s K
heraldedwaves of nationalizations,obrin (1984)
arguedthatthisperiodwas uniqueand nationalizat
1
tionwasn't ommon fter 975.2 owever,helargest
c
a
H
c
i
wm
ri
political isk nsurancelaims n history ere adein
c
t
thewakeof thefinancialrisis hatstruck rgentina
A
b
in 2002 as nationaland state governmentsroke
o
t
contracts nd restrictedhe capitaltransactionsf
a
firmsMoran2003). Multinationals aynot
(
m
foreign
n
that
facethe same risksof outright ationalizations
b
d
theyfacedin the 1960s-1970s, ut recent evelopmentsn Bolivia, ussia, ndVenezuela ighlight i
a
that
R
h
r
s
m
political isks tillaffect ultinationals.3
in
e
l
The existingiterature politicalscience, cois
o
a
nomics, nd management divided n howpolitical
considerinstitutions
affect heserisks.Specifically,
t
able debate rages over the impact of democratic
a
ForeignDirectInvestment nd
on
d
i
T
i
politicalnstitutions foreign irectnvestors.hePoliticalRisk
there re a number fmechanisms
a
o
through
oretically
f
c
whichpolitical egimes ould affectnvestors,rom
i
r
o
o
c
p
politicalrisk,to tax policy,to governmentolicies Despitethegrowingonsensus n theimportancef directinvestment
macroeconomicerformance.
(FDI) and the
f
attractingoreign
p
affecting
and
i
'See Henisz(2000,2002a,2002b),Jensen2002,2003,2006), and Li and Resnick2003) fordomesticnstitutions FDI inflows. (
(
o
2Seealso Minor(1994). See Kobrin(1980) fora breakdown f expropriations sector. by
and
o
i
t
r
o
r
s
h
impact n privatenvestment
3Ina recent tudy n political iskin Africa,cholars avefound hatpolitical iskhas a significant s
S
t
thatfirms avelimited eansof reducing heserisks. ee Collierand Pattillo 2000). h
m
(
TheJournal fPolitics, ol. 70, No. 4, October2008,Pp. 1040-1052 V
o
P
S
A
x 2008 Southern olitical cience ssociation

10o4o

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doi:10.1017/S0022381608081048
ISSN 0022-3816

POLITICAL RISK, DEMOCRATIC INSTITUTIONS, AND) FOREIGN DIRECT INVESTMENT

shiftn developingountries rom ostility FDI to
i
f
c
to
h
t
still
country romotion o attract DI, governments
p
F
enactpoliciesthathave direct nd indirect egative
a
n
effects n the profitability multinationalirms.
o
of
f
t
o
r
Although hesecomplexforms f political iskvary
over time and across industries, ernon's (1971)
V
o
theory f "obsolescing argaining" rovidesnsights
b
p
i
intotherelationshipetween ation-states mulb
n
and
tinationals. irmsare open to opportunisticolicy
F
p
o
h
changes ncean investmentas beenmade,allowing
for the possibility f the initialagreement truck
o
s
betweenhefirmndgovernmentbecome obsolete"
t
a
to
"
after
investment.4
Governments ayopenly xproprim
e
ate assets(Kobrin 1979) or attempt o renegotiate
t
contracts
a
1
(Gatignon nd Anderson...
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