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ABSTRACT
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.
Acknowledgements
The author wishes to thank two reviewers and the editor for their comments and valuable feedback and Lala Muradova for excellent research assistance.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes on contributor
Abel Escribà-Folch is Associate Professor at Universitat Pompeu Fabra (Barcelona). His research interests include authoritarian politics, foreign pressure, and democratization. He has authored articles for a number of journals and a book (co-authored with Joseph Wright): Foreign Pressure and the Politics of Autocratic Survival (Oxford University Press, 2015).
ORCiD
Abel Escribà-Folch http://orcid.org/0000-0001-7344-1585
Notes
1. UNCTAD, World Investment Report 2015.
2. Scherer and Palazzo, “The New Political Role of Business in a Globalized World.”
3. Clapham, Human Rights Obligations of Non-State Actors.
4. Available at: http://www.icj.org/report-of-the-international-commission-of-jurists-expert-legal-panel-on-corporate-complicity-in-international-crimes/
5. Hafner-Burton, “Right or Robust?”
6. Autocracies' human rights records are on average poorer than those of democracies. Davenport, “Human Rights and the Democratic Proposition”; and Davenport, “The Promise of Democratic Pacification.”
7. Jensen, “Democratic Governance and Multinational Corporations”; Ahlquist, “Economic Policy, Institutions, and Capital Flows”; and Choi and Samy, “Reexamining the Effect.”
8. Li and Resnick, “Reversal of Fortunes.”
9. Moon, “Foreign Direct Investment, Commitment Institutions.”
10. Pevehouse, Democracy from Above; Gleditsch and Ward, “Diffusion and the International Context of Democratization”; Finkel, Pérez-Liñán, and Seligson, “The Effects of U.S. Foreign Assistance”; Levitsky and Way, Competitive Authoritarianism; Wright, “How Foreign Aid”; and Escribà-Folch and Wright, Foreign Pressure.
11. Meyer, “Human Rights and MNCs”; Apodaca, “Global Economic Patterns”; Richards, Gelleny, and Sacko, “Money with a Mean Streak?”; Hafner-Burton, “Right or Robust?”; and Dutta and Roy, “The Impact of Foreign Direct Investment on Press Freedom.”
12. Eichengreen and Leblang, “Democracy and Globalization.”
13. Rudra, “Globalization and the Strengthening of Democracy.”
14. Li and Reuveny, “Economic Globalization and Democracy”; and Li and Reuveny, Democracy and Economic Openness.
15. Teorell, Determinants of Democratization; and Quinn, “Democracy and International Financial Liberalization.”
16. See, for a review, Li and Reuveny, Democracy and Economic Openness.
17. Levitsky and Way, Competitive Authoritarianism.
18. Ibid., 47–50.
19. Malesky, “Foreign Direct Investors as Agents of Economic Transition.”
20. Kwok and Tadesse, “The MNC as an Agent of Change.”
21. Spar, “The Spotlight and the Bottom Line.”
22. Armijo, “Mixed Blessing”; Li and Reuveny, “Economic Globalization and Democracy”; Rudra, “Globalization and the Strengthening of Democracy”; and Malesky, “Straight Ahead on Red.”
23. Li and Reuveny, “Economic Globalization and Democracy”; Dutta and Roy, “The Impact of Foreign Direct Investment on Press Freedom”; and Maxfield, “Understanding the Political Implications.”
24. Rudra, “Globalization and the Strengthening of Democracy”; and McMann, Economic Autonomy and Democracy.
25. Rudra, “Globalization and the Strengthening of Democracy.”
26. Geddes, Wright, and Frantz, “Autocratic Breakdown.”
27. Collier and Hoeffler, “Greed and Grievance”; Ross, “A Closer Look”; and Dunning, Crude Democracy. However, recent evidence shows that oil stabilizes autocracies by precisely reducing the risk of an autocratic transition. Wright, Frantz, and Geddes, “Oil and Autocratic Regime Survival.”
28. Tomashevskiy, “Investing in Violence.”
29. Geddes, Wright, and Frantz, “Autocratic Breakdown”; and Escribà-Folch and Wright, Foreign Pressure.
30. Armijo, “Mixed Blessing,” 34.
31. Armijo, “Mixed Blessing”; and Jensen, “The Multinational Corporation Empowers the Nation-State.”
32. Moran, Multinational Corporations and Dependency; and Gilpin, The Political Economy of International Relations.
33. Wintrobe, The Political Economy of Dictatorship; Desai, Olofsgard, and Yousef, “The Logic of Authoritarian Bargains”; and Gerschewski, “The Three Pillars of Stability.”
34. Hansen and Rand, “On the Causal Links between FDI and Growth.” The evidence is not conclusive though. For a review, see de Mello, “Foreign Direct Investment in Developing Countries.” The impact of FDI on growth is often shown to be conditional on factors such as human capital and financial development.
35. Maxfield, “Understanding the Political Implications,” 1216.
36. Dillman, “International Markets and Partial Reforms.”
37. Ibid., 71.
38. Malesky, Gueorguiev, and Jensen, “Monopoly Money.”
39. Hellman, Jones, and Kaufmann, “Are Foreign Investors and Multinationals?”
40. The company is also on trial for another case of bribery in Nigeria. Parodi, “Judge Orders Saipem to Stand Trial.”
41. Magaloni, Voting for Autocracy.
42. Youngs, “Democracy and the Multinationals,” 140.
43. Ibid. See also Armijo, “Mixed Blessing”; and Dillman, “International Markets and Partial Reforms.” Joint-ventures need not be a requirement to be adopted. Foreign investors may value having a local partner who provides relevant local knowledge.
44. Haughton, “Vietnam and Foreign Direct Investment.”
45. Waldman and Salomon, “Foreign Firms Show Concern.”
46. Borsuk, Casey, and McCarthy, “European Groups Cut Ties.”
47. For example, one of Vietnam's main foreign investors has been Singapore's state-owned Keppel Group. See Haughton, “Vietnam and Foreign Direct Investment.”
48. Improvements in human rights practices are compatible with durable authoritarian rule. Limited liberalizations may be used as a concession to the opposition when other instruments of support-buying dwindle. Desai, Olofsgard, and Yousef, “The Logic of Authoritarian Bargains”; and Conrad, “Constrained Concessions.”
49. Dann and Haddow, “Just Doing Business or Doing Just Business.”
50. Rohter, “Ford Motor is linked to Argentina's ‘Dirty War’.”
51. Winter, “Documents Suggest Foreign Automakers.”
52. Bayulgen, “Foreign Investment, Oil Curse, and Democratization”; and Asiedu and Lien, “Democracy, Foreign Direct Investment and Natural Resources.”
53. Geddes, “Democratization after Twenty Years.”
54. Magaloni, Voting for Autocracy; and Greene, “Why Dominant Parties Lose.”
55. Geddes, Wright, and Frantz, “Autocratic Breakdown.”
56. The number of observations may vary due to availability constraints in some of the independent variables.
57. Geddes, Wright, and Frantz, “Autocratic Breakdown.”
58. Armijo, “Mixed Blessing.”
59. Negative values are recoded as zeros.
60. Personalist regime is the excluded category. Geddes, “Democratization after Twenty Years.”
61. Both variables are from Maddison, “World Population, GDP and Per Capita GDP.”
62. Data are from Ross, The Oil Curse.
63. The variables can take three values: 0 for no war; 1 for at least one low-intensity war; and 2 for at least one high-intensity war. Data are from Gleditsch et al., “Armed Conflict 1946–2001.”
64. Neighbouring countries are defined as any country with a capital city within 4000 km of a given country. The results are nearly identical if Geddes et al.'s data is used to identify neighbouring democracies. Geddes, Wright, and Frantz, “Autocratic Breakdown”; and Cheibub, Gandhi, and Vreeland, “Democracy and Dictatorship Revisited.”
65. A fixed-effects logit would drop countries that do not transition during the sample period, which would substantially increase the baseline probability of a transition in the sample.
66. If these controls are excluded, the effect of FDI is slightly stronger.
67. The index takes on higher values the more financially open a country is. Data are from Chinn and Ito, “A New Measure of Financial Openness.”
68. Both variables are from the WDI.
69. Correlation between FDI and portfolio investment is 0.52 and that between FDI and trade is 0.60.
70. These models with two sets of additional controls have also been estimated using country random- and fixed-effects yielding very similar results. FDI becomes significant in the autocratic transitions model when fixed-effects are used and controls for portfolio investment and trade added – which reduces the sample size and adds some problems of multicollinearity. See Appendix on author's website.
71. Bell and Sudduth, “The Causes and Outcomes of Coup.”
72. I get very similar results if oil reserves are used instead of rents to reduce endogeneity, or if I use total resource rents as a percentage of GDP from the WDI.
73. Results are not reported for space reasons (see Appendix). FDI has a strong negative effect on the risk of democratization in monarchies too, but the estimates are unreliable due to the paucity of events: only two transitions within the sample, both in Nepal.