4 - Partisan Governments and Foreign Direct Investment: Results from Cross-Country Statistical Analyses

Summary

Introduction

In this chapter, I aim to assess the effect of the partisan alignments of the chief executive in the host country on the levels of inbound foreign direct investment (FDI) flows. I present the results from statistical analyses of the main hypotheses derived in Chapters 2 and 3. The statistical models build on a vast body of empirical literature in economics on the determinants of capital flows. The analysis establishes that when the conditions for investment are present, politics can have a sizable impact on investment flows. The driving political force in the host country reflects the expected distributive consequences of investment inflows. As I argue in Chapters 2 and 3, governments are likely to adopt investment regimes that benefit their core constituents and to abide by these policies over time. Pro-labor governments promote the well-being of workers and pro-business governments promote policies that benefit domestic capital owners. In the first stage of the analysis, I assess the external validity of one of the implications of this partisan hypothesis, namely the effect of partisanship on investment policy.

For this purpose, I develop a measure of investment policy orientation using data from OECD countries. There are numerous policy instruments, or political outcomes, that affect either the returns to capital or its form of entry, which is ultimately what FDI regimes target. Host governments may, among other initiatives, grant tax breaks and subsidies, regulate market structure, adjust trade policy, protect property rights, establish nationality and/or performance requirements, or create differential exchange rates in order to attract or deter the inflow of capital.