https://orcid.org/0000-0003-0621-4192
![Sample our Politics & International Relations journals, sign in here to start your FREE access for 14 days]({"type":"image" , "src" : "/sda/5947/TOC-Subject-Sample-2021-Politics-International-Relations.jpg"})
ABSTRACT
How do foreign direct investment (FDI) inflows affect democratic survival? No study has examined how FDI influences the likelihood of democratic survival, although many studies have studied the effect of regime type on FDI inflows. The previous finding that FDI contributes to authoritarian survival and decreases prospects for democratization does not answer this question since determinants of democratic transitions are clearly distinct from those of democratic survival. I argue that FDI in non-primary sectors is more likely than FDI in primary sectors to contribute to democratic survival since non-primary FDI is likely to produce growth-enhancing effects through upstream and downstream linkages in the host economy and facilitate the diffusion of democratic ideas and norms originating from the West. To overcome the problem of the sectoral FDI data's poor coverage, I exploit an exogenous variation in FDI inflows by utilizing a country's geographical distance from developed economies. Using a sample of democracies from 1970 to 2010, I find that inward FDI, instrumented by market proximity to developed economies, is associated with an increased likelihood of democratic survival. The analysis of primary and non-primary FDI also provides supporting evidence.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 Eichengreen and Leblang, “Democracy and Globalization”; Li and Reuveny, “Reversal of Fortunes.”
2 See Bak and Moon, “Foreign Direct Investment and Authoritarian Stability”; Escriba-Folch, “Foreign Direct Investment and the Risk of Regime Transition in Autocracies”; Tomashevskiy, “Investing in Violence.”
3 See Haggard and Kaufman, Dictators and Democrats; Przeworski et al., Democracy and Development.
4 Mihalache-O’Keef, “Whose Greed.”
5 Pinto and Zhu, “Fortune or Evil?”; Jaumotte, Lall, and Papageorgiou, “Rising Income Inequality.”
6 Said that, there are studies that investigate how FDI affects the level of democracy. See Li and Reuveny, “Reversal of Fortunes”; Rudra, “Globalization and the Strengthening of Democracy.”
7 Janz, “Foreign Direct Investment and Repression”; Mihalache-O’Keef, “Whose Greed”; Wright and Zhu, “Monopoly Rents.”
8 Wright and Zhu, “Monopoly Rents.”
9 For similar approach, see note 2 above. However, they do not emphasize that the instrumental estimates gauge the effect of a particular type of FDI that is driven by market proximity.
10 Caves, Multinational Enterprise and Economic Analysis.
11 See Acemoglu and Robinson, Economic Origins; Linz, “The Perils of Presidentialism”; Przeworski et al., Democracy and Development; Svolik, “Which Democracies Will Last?”; Haggard and Kaufman, Dictators and Democrats.
12 See von Borzyskowski and Vabulas, “Credible Commitments?”; Meyerrose, “Unintended Consequences of Democracy Promotion”; Poast and Urpelainen, Organizing Democracy.
13 De Mello, “Foreign Direct Investment-Led Growth”; Kose et al., “Financial Globalization”; Blomström, Graham, and Moran, Does Foreign Direct Investment Promote Development?
14 However, it is important to note that despite these consistent theoretical predictions, empirical evidence on the relationship between FDI and growth is inconclusive since the existing literature is populated by conflicting empirical results. See Hansen and Rand, “On the Causal Links”; Herzer, “How Does Foreign Direct Investment Really Affect”; Blomström, Graham, and Moran, Does Foreign Direct Investment Promote Development. An increasing number of studies suggest that it is conditional on several factors, such as the heterogeneous nature of FDI and the absorptive capacity of host countries and local firms. See Alfaro et al., “FDI and Economic Growth”; Borensztein, De Gregorio, and Lee, “How Does Foreign Direct Investment Affect Economic Growth?”; Blomström, Graham, and Moran, Does Foreign Direct Investment Promote Development; Zhang et al., “FDI Spillovers.”
15 Escriba-Folch, “Foreign Direct Investment and the Risk of Regime Transition.”
16 Przeworski et al., Democracy and Development; Svolik, “Which Democracies Will Last?”
17 Haggard and Kaufman, Dictators and Democrats.
18 Kim, “Revisiting Economic Shocks and Coups.”
19 Lipset, “Some Social Requisites of Democracy.”
20 Przeworski et al., Democracy and Development.
21 Levitsky and Way, Competitive Authoritarianism.
22 Pérez-Liñán and Mainwaring, Democratic Breakdown and Survival in Latin America.
23 Escriba-Folch, “Foreign Direct Investment and the Risk of Regime Transition.”
24 Dahl, Polyarchy.
25 Jensen, “Political Risk.”
26 Hartlyn, “Democracy in the Caribbean,” 166; Levitsky and Way, Competitive Authoritarianism, 47.
27 Jensen, “Political Risk”; Li and Resnick, “Reversal of Fortunes.”
28 Arel-Bundock, Peinhardt, and Pond, “Political Risk Insurance.”
29 Escriba-Folch, “Foreign Direct Investment and the Risk of Regime Transition”; Tomashevskiy, “Investing in Violence.”
30 Pinto and Zhu, “Fortune or Evil?”
31 Ibid.
32 Pinto and Zhu, “Brewing Violence”
33 Hymer, “Multinational Corporation and the Law of Uneven Development.”
34 Pinto and Zhu, “Fortune or Evil?”
35 Ibid.
36 Malesky, Gueorguiev, and Jensen, “Monopoly Money”; Mezias, “Identifying Liabilities.”
37 Bauhr and Charron, “Insider or Outsider?”
38 Pinto and Zhu, “Fortune or Evil?”
39 Haggard and Kaufman, Dictators and Democrats.
40 E.g. Acemoglu and Robinson, Economic Origins.
41 Feenstra and Hanson, “Globalization, Outsourcing, and Wage Inequality”; Jaumotte, Lall, and Papageorgiou, “Rising Income Inequality.”
42 Blomstrom, Kokko, and Zejan, Foreign Direct Investment.
43 Haggard and Kaufman, Dictators and Democrats.
44 Chakraborty and Nunnenkamp, “Economic Reforms, FDI, and Economic Growth”; Nunnenkamp and Spatz, “Foreign Direct Investment and Economic Growth.”
45 See note 7 above.
46 Nunnenkamp and Spatz, “Foreign Direct Investment and Economic Growth,” 57.
47 Aykut and Sayek, “Role of the Sectoral Composition.”
48 Baumol and Willig, “Fixed Costs”; Wright and Zhu, “Monopoly Rents.”
49 Mihalache-O’Keef, “Whose Greed.”
50 Haggard and Kaufman, Dictators and Democrats.
51 Wright and Zhu, “Monopoly Rents.”
52 Li and Resnick, “Reversal of Fortunes”; Wright and Zhu, “Monopoly Rents.”
53 Mihalache-O’Keef, “Whose Greed.”
54 Doytch and Uctum, “Does the Worldwide Shift.”
55 Aykut and Sayek, “The Role of the Sectoral Composition.”
56 Janz, “Foreign Direct Investment and Repression.”
57 Boix, Miller, and Rosato, “Complete Data Set of Political Regimes.”
58 As Kerner (in “What We Talk”) argues, it is important to use a relevant measure of FDI that match the theoretical mechanisms. Given that both FDI flows and stocks are relevant to the theoretical mechanisms, I chose FDI flows over stock because of practical reasons. All the previous studies on FDI and authoritarian regime survival use FDI flows. See note 2 above. Second, data on FDI flows are available for a longer period of time than data on FDI stock. Last, data on FDI stock are not measured in a consistent manner across time periods and countries, which makes cross-country comparison difficult and unreliable. See Kerner, “What We Talk,” 810.
59 Wright and Zhu, “Monopoly Rents.”
60 Ibid.
61 See note 2 above.
62 Head and Mayer, “Gravity Equations.”
63 Caves, Multinational Enterprise and Economic Analysis.
64 Jensen, “Political Risk”; Li and Resnick, “Reversal of Fortunes”
65 I use the COW project's region definition that is atheoretical and geography-driven because the instrument variable is weighted by the inverse of geographic distance.
66 See Table A1 for data sources of control variables.
67 Full estimates of the first-stage equations are reported in Table A2 of the supporting appendix. The first-stage estimates show that market closeness is a strong predictor of FDI inflows per capita. The Cragg-Donald Wald F-statistics for the excluded instrument do not indicate a weak instrument problem.
68 I set all the other covariates to the values observed for each observation and obtain average effects.
69 Keele, Stevenson, and Elwert, “Causal Interpretation.”
70 Natural resources rents seem to absorb the explanatory power of nonprimary FDI in Model 6 of . However, caution is needed in interpreting the result since the use of sectoral FDI instead of total FDI reduces the sample size about 80%, and coefficients on natural resource rents are not statistically significant and are close to zero in Tables 2 and 4.
71 Svolik, “Which Democracies Will Last?”
72 Geddes, Wright, and Frantz, “Autocratic Breakdown and Regime Transitions.”
73 Mihalache-O’Keef, “Whose Greed.”
74 Janz, “Foreign Direct Investment and Repression.”
75 Wright and Zhu, “Monopoly Rents.”
Additional information
Funding
Notes on contributors
Nam Kyu Kim
Nam Kyu Kim is an Associate Professor in the Department of Political Science and International Relations at Korea University. His research interests include authoritarian politics, regime transitions, and civil–military relations. His work has appeared in journals such as Comparative Political Studies, Democratization, Journal of Conflict Resolution, Journal of Peace Research, Political Science Research and Methods and others.