https://orcid.org/0000-0002-2753-4569
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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.
Acknowledgements
For valuable comments, I wish to thank Dale Smith, Mark Souva, Sean Ehrlich, Christopher Reenock, Eddie Hearn, Taehee Whang, Byungwon Woo, Svitlana Chernykh, and three anonymous reviewers of Democratization.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes on the contributor
Chungshik Moon is an Assistant Professor in the Department of Political Science and International Relations at Chung-Ang University. His research focuses on the causes and consequences of economic globalization, with specific emphasis on foreign direct investment, official development assistance, and authoritarian politics. His work has appeared in Comparative Political Studies, International Studies Quarterly, Journal of Conflict Resolution, among others.
ORCID
Chungshik Moon http://orcid.org/0000-0002-2753-4569
Notes
* An earlier version of this article was presented at the 4th Annual Conference of the Australian Society for Quantitative Political Science, University of Melbourne, 9 December 2015. The article draws in part on chapter 3 of Chungshik Moon, “Credible Commitment Institutions and Foreign Direct Investment: How are Autocratic Countries able to Attract FDI?” Ph.D. diss., Florida State University, 2014.
1 Oatley, International Political Economy.
2 Brunetti, Kisunko, and Weder, Institutional Obstacles; Henisz, “The Institutional Environment,” 334; Jensen, “Democratic Governance”; Jun and Singh, “Foreign Direct Investment”; Schneider and Frey, “Economic and Political Determinants”; Li and Resnick, “Reversal of Fortunes.”
3 Ahlquist, “Economic Policy”; Choi and Samy, “Effect of Democratic Institutions”; Feng, “Political Freedom”; and Jensen, Nation-States. Li and Resnick, “Reversal of Fortunes” notably dissent.
4 Regime type is defined by Przeworski et al., Democracy and Development.
5 Moon, “Foreign Direct Investment”; Wright and Zhu, “Monopoly Rents.”
6 Gandhi, Political Institutions under Dictatorship.
7 Here, I am mainly concerned with domestic factors. For international conditions, for instance, see Büthe and Milner, “Foreign Direct Investment,” and Kerner, “What We Talk About.”
8 Henisz, “The Institutional Environment.”
9 Roberts, Economic Policy, Political Constraints.
10 Clague et al., “Contract-Intensive Money” and Haggard, Pathways from the Periphery.
11 See note 6 above. Note that Li and Resnick, “Reversal of Fortunes,” provide an alternative view that regime types have mixed effects on FDI inflows.
12 See note 8 above.
13 See note 9 above.
14 Boix and Svolik, “Limited Authoritarian Government”; Mesquita et al., Logic of Political Survival; Cheibub, Gandhi, and Vreeland, “Democracy and Dictatorship Revisited”; Gandhi, Political Institutions Under Dictatorship; Geddes, “Authoritarian Breakdown”; Gehlbach and Keefer, “Investment Without Democracy”; Gehlbach and Keefer, “Private Investment”; Levitsky and Way, Competitive Authoritarianism; Wright, “Do Authoritarian Institutions Constrain.” For example, Mesquita et al. adopt two institutional dimensions: the selectorate (those who choose a leader) and the winning coalition (the minimum size of support for a leader to stay in power). Cheibub et al. employ a three-way classification consisting of monarchy, military, and civilian dictator, based on the question of who can depose a leader. Geddes, Paradigms and Sand Castles, uses a similar classification; however, she further disaggregates “civilian dictators” into single-party and personalist dictators.
15 Gasiorowski, “Economic Crisis.”
16 Gandhi and Przeworski, “Cooperation, Cooptation, and Rebellion”; Gandhi, Political Institutions under Dictatorship.
17 Magaloni, “Credible Power-Sharing”; Gehlbach and Keefer, “Investment Without Democracy”; Gehlbach and Keefer, “Private Investment”; and Boix and Svolik, “Limited Authoritarian Government.”
18 Magaloni, “Credible Power-Sharing.”
19 Gehlbach and Keefer, “Investment without Democracy”; Gehlbach and Keefer, “Institutionalization of Collective Action.”
20 Boix and Svolik, “Limited Authoritarian Government.”
21 North and Weingast, “Constitutions and Commitment.”
22 Wright, “Do Authoritarian Institutions Constrain.”
23 See note 23 above.
24 North and Weingast, “Constitutions and Commitment.”
25 Gandhi, Political Institutions under Dictatorship.
26 Gehlbach and Keefer, “Investment Without Democracy” and Gehlbach and Keefer, “Institutionalization of Collective Action” are exceptions to this. They argue that autocracies with institutionalized ruling parties attract more private investments.
27 Bak and Moon, “Foreign Direct Investment.”
28 Rosendorff and Shin, “Importing Transparency.”
29 See note 20 above.
30 See note 24 above.
31 Tsebelis, “Decision Making.”
32 Henisz, “The Institutional Environment.”
33 Pinto, Partisan Investment in the Global Economy; Pandya, “Foreign Direct Investment Liberalization.”
34 Bak and Moon, “Foreign Direct Investment,” 2004.
35 Li, “Democracy, Autocracy.”
36 See note 5 above.
37 See note 8 above.
38 Property rights institutions and autocratic political institutions are not severely correlated (p = 0.17).
39 Roberts, Economic Policy, Political Constraints.
40 See Online Appendix Table A1 and Figure A1. Some may wonder if the same logic holds with a direct measure of a veto player. One possible empirical prediction from this line of reasoning is that the number of veto players would have similar conditional effects on FDI inflows; the main findings hold when the nominally democratic institution variable is replaced with a measure of veto players (e.g. Henisz’s Polcon). While it is not a main theoretical concern of this article, Online Appendix Table A1 and Figure A1 empirically confirm the validity of the logic discussed here.
41 North and Weingast, “Constitutions and Commitment.”
42 Gehlbach and Keefer, “Investment Without Democracy”; Gehlbach and Keefer, “Institutionalization of Collective Action”; Wright, “Do Authoritarian Institutions Constrain.”
43 Gehlbach and Keefer, “Investment Without Democracy”; Gehlbach and Keefer, “Institutionalization of Collective Action”; North and Weingast, “Constitutions and Commitment.”
44 Gandhi and Przeworski, “Cooperation, Cooptation, and Rebellion.”
45 Boix and Svolik, “Limited Authoritarian Government” and Magaloni, “Credible Power-Sharing.”
46 Boix and Svolik, “Limited Authoritarian Government”; Gandhi and Przeworski, “Cooperation, Cooptation, and Rebellion”; Gandhi, Political Institutions under Dictatorship; Magaloni, “Credible Power-Sharing.”
47 See note 8 above.
48 Another commonly used estimator is the panel corrected standard error model (PCSE), in Beck and Katz, “What to Do (and Not to Do).” PCSE performs poorly when the spatial dimension of the panel is large compared to the temporal dimension; Hoechle, “Robust Standard Errors,” 286. Using PCSE does not change the main findings.
49 While the within-country variation is not the main concern of this research, the findings are robust with country fixed effects models See .
50 Li, “Outlier, Measurement,” 174.
51 Allee and Peinhardt, “Contingent Credibility.”
52 See note 50 above.
53 See Online Appendix Table A3 and Figure A2. I also perform a robustness test using FDI stocks as the dependent variable; the main findings do not change.
54 Eichengreen and Irwin, “The Role of History”; Kerner, “Why Should I”; Yeyati, Panizza, and Stein, “The Cyclical Nature.”
55 Gandhi, Political Institutions under Dictatorship.
56 See Online Appendix Table A5. I also tested using an alternative coding scheme: 1 for the presence of legislatures (i.e. categories 1 and 2), 0 for otherwise. The results still support the hypotheses.
57 Clague et al., “Contract-Intensive Money.”
58 Ahlquist and Prakash, “Foreign Direct Investment”; Rios-Figueroa and Staton, “Cross-National,” 31; Souva, Smith, and Rowan, “Promoting Trade.”
59 Linzer and Staton, “A Global Measure.”
60 Wright, “To Invest or Insure.”
61 Clague et al., “Contract-Intensive Money,” 188 explain: the characteristics of third-party contract enforcement in countries are likely to explain much of the difference in firm and individual preferences governing the choice of money to use if contracts are generally unreliable. There can be no assurance that the money lent to financial institutions is safe. Another possible control variable is expropriation events data created by Hajzler (Citation2012), which reported three different types of expropriations acts from 1993 to 2006. While I do not include this variable due to a limited temporal domain, controlling for the variable does not change the main findings.
62 Dunning and Lundan, Multinational Enterprises.
63 Barro, “Democracy and Growth”; Lucas, “Mechanics of Economic Development”; Romer, “Endogenous Technical Change.”
64 Brunetti, Kisunko, and Weder, Institutional Obstacles; Jun and Singh, “Foreign Direct Investment”; Schneider and Frey, “Economic and Political Determinants.”
65 Büthe and Milner, “Bilateral Investment Treaties”; Kerner, “Why Should I.”
66 World Bank Group, World Development Indicators 2011.
67 Banks and Wilson, “Cross-National Data Archive.”
68 The control variables are not severely correlated with key independent variables. The correlations range from −0.13 to 0.22.
69 North and Weingast, “Constitutions and Commitment.”
70 In “Understanding Interaction Models,” Brambor, Clark, and Golder suggest that it is possible for the marginal effect of X on Y to be significant for substantively relevant values of the modifying variable Z, even if the coefficient on the interaction term is insignificant.
71 Linzer and Staton, “A Global Measure.”
72 Ibid.
73 Li and Resnick, “Reversal of Fortunes.”
74 Geddes, “Authoritarian Breakdown”; Geddes, Paradigms and Sand Castles; updated by Wright, “To Invest or Insure.”
75 Wright, “To Invest or Insure.”
76 Geddes, Paradigms and Sand Castles, 51.
77 Note that the online appendix tables report various additional robustness test results.
78 Gandhi, Political Institutions under Dictatorship.