Political turnover, regime type, and investment behavior

ABSTRACT

Firms and individuals condition their investment choices on domestic political factors in host countries. Existing research describes how government preferences and policy choices influence investment behavior. Some have argued that investors take a cautious approach in response to possible government turnover. We argue that the results of domestic political competition also matter. Domestic turnover creates uncertainty about the future direction of policy in a variety of areas relevant to investment decisions – e.g., changes in privileged relationships between the state and certain domestic producers or industries, trade barriers, and tax policies. Investors and firms should therefore hesitate to invest following domestic turnover in potential host countries. However, various institutional features of democracies should mitigate the extent to which domestic turnover causes uncertainty and deters investment. Our statistical analysis suggests that while non-democracies see less foreign direct investment in the wake of a change in the source of leader support, investment to democracies does not change significantly following domestic turnover. The note enhances our understanding of the determinants of investment and provides further evidence that democratic institutions matter for conditioning the effects of domestic turnover in a new empirical domain.

Las empresas y las personas condicionan sus opciones de inversión a los factores políticos internos de los países anfitriones. Los estudios existentes describen cómo las preferencias del Gobierno y las decisiones políticas influyen en el comportamiento de inversión. Algunos argumentan que los inversores adoptan un enfoque cauteloso en respuesta a un posible cambio de gobierno. Nosotros sostenemos que los resultados de la competencia política interna también son importantes. Los cambios de gobierno nacional crean incertidumbre sobre la futura dirección de la política en una serie de áreas relevantes para las decisiones de inversión, por ejemplo, los cambios en las relaciones privilegiadas entre el Estado y ciertos productores o industrias nacionales, las barreras comerciales y las políticas fiscales. Por lo tanto, los inversores y las empresas deberían dudar a la hora de invertir tras un cambio de gobierno nacional en los posibles países anfitriones. Sin embargo, varias características institucionales de las democracias deberían mitigar la medida en que los cambios de gobierno nacional generan incertidumbre y desalientan la inversión. Nuestro análisis estadístico sugiere que, mientras que en las naciones que no son democráticas hay menos inversión extranjera directa tras un cambio en la fuente de apoyo de los líderes, la inversión en las democracias no cambia significativamente tras un cambio de gobierno nacional. El artículo nos ayuda a comprender mejor los determinantes de la inversión y proporciona más pruebas de que las instituciones democráticas son importantes para condicionar los efectos de los cambios de gobierno nacional en un nuevo ámbito empírico.

Les entreprises et les particuliers conditionnent leurs choix d’investissement à des facteurs de politique nationale de leurs pays hôtes. Des recherches existantes décrivent la manière dont les préférences et les choix politiques des gouvernements influencent le comportement d’investissement. Certaines soutiennent que les investisseurs adoptent une approche prudente en réponse aux éventuels changements de gouvernements. Pour notre part, nous affirmons que les résultats de la concurrence politique nationale comptent également. Les changements de gouvernements nationaux génèrent de l’incertitude sur l’orientation politique future dans divers domaines pertinents pour les décisions d’investissement, p. ex. les changements de relations privilégiées entre l’État et certains producteurs nationaux ou certaines industries nationales, les barrières commerciales et les politiques fiscales. Les investisseurs et sociétés risquent donc d’hésiter à investir suivant les changements de gouvernements nationaux de leurs pays hôtes potentiels. Cependant, diverses caractéristiques institutionnelles des démocraties risquent également d’atténuer la mesure dans laquelle ces changements de gouvernements entraînent une incertitude et dissuadent l’investissement. Notre analyse statistique suggère que tandis que les pays non démocratiques bénéficient de moins d’investissements étrangers directs à la suite d’un changement de source de soutien des dirigeants, les investissements dans les démocraties n’évoluent pas de manière significative à la suite d’un changement de gouvernement national. Cet article améliore notre compréhension des déterminants de l’investissement et fournit des preuves supplémentaires que les institutions démocratiques comptent pour le conditionnement des effets des changements de gouvernements nationaux dans un nouveau domaine empirique

KEYWORDS:

• Political turnover
• democracy
• sources of leader support
• foreign direct investment
• uncertainty

Acknowledgements

We would like to thank Ali Fisunoglu, Amuitz Garmendia, Sebastian Lavezzolo, Drew Ritchey, Ignacio Sanchez-Cuenca, Jacopo Timini, and participants at the 2018 Conference of Doctores Miembro and Current and Former Post-Doctoral Research Fellows of the Juan March Institute.

Supplementary material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

¹ This pattern is especially important in competitive elections (Gehlbach and Keefer 2012) and in the United States (Julio and Yook 2016).

² Li (2009a) develops a theory of leader tenure in democratic versus autocratic regimes as it affects the risk that host governments expropriate firms’ investments, determining that a central component of expropriation risk is political constraint. Further, Adam and Filippaios (2007) find a positive relationship between political liberties and FDI, and Staats and Biglaiser (2012) report similar results for judicial strength and rule of law.

³ Jensen (2006, 9) notes that while, “[s]ome scholars would be quick to point out that democracies experience higher levels of leadership turnover, which could have a negative impact on policy stability and ultimately country credibility,” he instead finds that, “[t]his theory was not supported by the qualitative evidence.” Indeed, as we report below, it is in non-democratic states where political turnover leads to uncertainty.

⁴ Multiple SOLS changes occur in only 2% of country-years in our data (a maximum of 2 per year).

⁵ For further discussion on this point see Rooney (2018).

⁶ Regime changes often occur during the rule of the same governing coalition. Only half of all regime changes in this sample coincide with SOLS changes.

⁷ SOLS changes happen in 15% of democratic country-years and just 4% of non-democratic country-years in the data, underscoring the importance of accounting for the possibility of separate effects. In our sample, we observe 70 SOLS changes for non-democratic states using the Polity measure, thus providing sufficient leverage to examine differences across regimes.

⁸ Before 1982 we have a substantial number of missing values for our controls, and these data are likely not missing at random. The SOLS data only extend to 2008 at this time.

⁹ Shapiro-Wilk tests indicate our measure is not normally distributed.

¹⁰ The estimated coefficients are for the exponentiated independent variables.

¹¹ Figures for the democracy dummy variable and the V-Dem variables in Section H of the Online Appendix display similar patterns.

¹² We run this same test for past-regime turnover and find no difference in results.

¹³ Table 9 in Section F the Appendix controls for leadership turnover that does not result in a change in the source of leader support, which also does not affect our key results.