Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-08T08:02:24.010Z Has data issue: false hasContentIssue false
  • English
  • Français

Foreign direct investment policy, domestic firms, and financial constraints

Published online by Cambridge University Press:  22 July 2019

Sarah Bauerle Danzman
Get access Rights & Permissions [Opens in a new window]

Abstract

The past three decades have witnessed a spectacular evolution in policies toward foreign direct investment (FDI). Whose interests do these policy innovations reflect? While existing theory suggests popular pressure drives openness, I argue reforms occur when shifts in financial access change local economic elites’ policy preferences toward FDI. When large domestic firms no longer have access to cheap credit through political connections, liquidity constraints outweigh firms' preferences to exclude foreigners. Economic elites then pressure governments to pursue liberal FDI policy environments. Using a combination of measures of FDI policy for up to 166 countries from 1973–2015, I find increases in financial constraints are robustly associated with decreases in foreign equity restrictions, and this relationship is strongest when domestic political institutions favor business interests. A financing constraints explanation of FDI policy reform has important implications for explanations of policy change, theories of business power amid increased interdependence, and expectations over the distributive effects of globalization.

Keywords

FDIeconomic liberalizationfirmsfinancelobbying
Type
Research Article
Information
Business and Politics , Volume 22 , Issue 2 , June 2020 , pp. 279 - 306
Copyright
Copyright © V.K. Aggarwal 2019 and published under exclusive license to Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

†

Many thanks to Layna Mosley, William K. Winecoff, Eddy Malesky, Nathan Jensen, David Leblang, panel participants at IPES 2015 and APSA 2016, and anonymous reviewers for helpful comments. This article draws from a larger book project: Merging Interests: When Domestic Firms Shape FDI Policy (Cambridge, 2020).

References

Abiad, Abdul, Detragiache, Enrica, and Tressel, Thierry. 2010. “A New Database of Financial Reforms.” IMF Staff Papers 57 (2): 281–302.CrossRefGoogle Scholar
Acemoglu, Daron, and Robinson, James A.. 2008. “Persistence of Power, Elites, and Institutions.” American Economic Review 98 (1): 267–93.CrossRefGoogle Scholar
Aitken, Brian, and Harrison, Anne E.. 1999. “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela.” American Economic Review 89 (3): 605–18.CrossRefGoogle Scholar
Aitken, Brian, Harrison, Anne E., and Lipsey, Robert E.. 1996. “Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela, and the United States.” Journal of International Economics 40 (3–4): 345–71.CrossRefGoogle Scholar
Aizenman, Joshua. 2005. “Opposition to FDI and Financial Shocks.” Journal of Development Economics 77: 467–76.CrossRefGoogle Scholar
Alfaro, Laura, and Chen, Maggie X.. 2012. “Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance.” American Economic Journal: Economic Policy 4 (3): 30–55.Google Scholar
Alfaro, Laura, and Chen, Maggie X.. 2018. “Selection and Market Reallocation: Productivity Gains from Multinational Production.” American Economic Journal: Economic Policy 10 (2): 1–38.Google Scholar
Alfaro, Laura, Chandra, Areendam, Kalemli-Ozcan, Sebnem, and Sayek, Selin. 2004. “FDI and Economic Growth: The Role of Local Financial Markets.” Journal of International Economics 64 (1): 89–112.10.1016/S0022-1996(03)00081-3CrossRefGoogle Scholar
Bandelj, Nina. 2008. “Economic Objects as Cultural Objects: Discourse on Foreign Investment in Post-Socialist Europe.” Socio-Economic Review 6: 671–702.CrossRefGoogle Scholar
Beck, Nathaniel, and Katz, Jonathan N.. 2011. “Modeling Dynamics in Time-Series-Cross-Section Political Economy Data.” Annual Review of Political Science 14: 331–52.CrossRefGoogle Scholar
Borensztein, E., De Gregori, J., and Lee, J-W. 1998. “How Does Foreign Direct Investment Affect Economic Growth.” Journal of International Economics 45 (1): 115–35.CrossRefGoogle Scholar
Brambor, Thomas, Clark, William Roberts, and Golder, Matt. 2006. “Understanding Interaction Models: Improving Empricial Analyses.” Political Analysis 14: 63–82.CrossRefGoogle Scholar
Chwieroth, Jeffrey M. 2010. Capital Ideas: The IMF and the Rise of Financial Liberalization. Princeton, NJ: Princeton University Press.Google Scholar
Cihak, Martin, Demirguc-Kunt, Ash, Feyen, Erik, and Levine, Rosee. 2012. Benchmarking Financial Systems around the World. The World Bank.CrossRefGoogle Scholar
Cruz, Ceci, Keefer, Philip, and Scartascini, Carlos. 2016. The Database of Political Institutions 2015. Database. Inter-American Development Bank, January 2016. available at https://publications.iadb.org/handle/11319/7408.Google Scholar
Culpepper, Pepper. 2011. Quiet Politics and Business Power: Corporate Control in Europe and Japan. Cambridge, United Kingdom: Cambridge University Press.Google Scholar
Ernst and Young. 2017. Transactions 2017: Inbound M&A Takes the Center Stage.Google Scholar
Feenstra, R. C., and Hanson, G. H.. 1997. “Foreign Direct Investment and Relative Wages: Evidence from Mexico's Maquiladoras.” Journal of International Economics 42 (3–4): 371–93.10.1016/S0022-1996(96)01475-4CrossRefGoogle Scholar
Fernández, Raquel, and Rodrik, Dani. 1991. “Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty.” American Economic Review 81 (December): 1146–55.Google Scholar
Frieden, Jeffrey. 1981. “Third World Indebted Industrialization: International Finance and State Capitalism in Mexico, Brazil, Algeria, and South Korea.” International Organization 35 (3): 407–31.CrossRefGoogle Scholar
Gourevitch, Peter A., and Shinn, James. 2005. Political Power and Corporate Control: The Global Politics of Corporate Goverance. Princeton, NJ: Princeton University Press.Google Scholar
Gupta, Nandini. 2005. “Partial Privatization and Firm Performance.” The Journal of Finance 60 (2): 987–1015.CrossRefGoogle Scholar
Havranek, Tomas, and Irsova, Zuzana. 2011. “Estimating Vertical Spillovers from FDI: Why Results Vary and What the True Effect is.” Journal of International Economics 85: 234–44.CrossRefGoogle Scholar
Hellman, Joel, Jones, Geraint, and Kaufmann, Daniel. 2003. “Seize the State, Seize the Day: State Capture and Influence in Transition Economies.” Journal of Comparative Economics 3: 751–73.CrossRefGoogle Scholar
Helpman, Elhanan. 2006. “Trade, FDI, and the Organization of Firms.” Journal of Economic Literature XLIV (September): 589–630.CrossRefGoogle Scholar
Howell, Lewellyn D.International Country Risk Guide Methodology. The PRS Group, Available at https://www.prsgroup.com/wp-content/uploads/2012/11/icrgmethodology.pdf (accessed on June 18, 2019).Google Scholar
International Monetary Fund. 2012. Liberalizing Capital Flows and Managing Outflows.CrossRefGoogle Scholar
International Monetary Fund. 2014. Annual Report on Exchange Arrangements and Exchange Restrictions.Google Scholar
Irsova, Zuzana, and Havranek, Tomas. 2013. “Determinants of Horizontal Spillovers from FDI:Evidence from a Large Meta-Analysis.” World Development 42: 1–15.CrossRefGoogle Scholar
Javorcik, Beata Smarzynska, and Spatareanu, Mariana. 2009. “Tough Love: Do Czech Suppliers Learn from their Relationships with Multinationals?” Scandinavian Journal of Economics 111 (4): 811–33.CrossRefGoogle Scholar
Johnston, R. Barry, Darbar, Salim M., and Echeverria, Claudia. 1997 (November). Sequencing Capital Account Liberalization: Lessons from the Experiences in Chile, Indonesia, Korea, and Thailand.Google Scholar
Kang, C. S. Eliot. 1997. “U.S. Politics and Greater Regulation of Inward Foreign Direct Investment.” International Organization 51 (2): 301–33.CrossRefGoogle Scholar
Kersting, Erasmus K., and Görg, Holger. 2017. “Vertical Integration and Supplier Finance.” Canadian Journal of Economics 50 (1): 273–305.Google Scholar
Kobrin, Stephen J. 2005. “The Determinants of Liberalization of FDI Policy in Developing Countries: A Cross-Sectional Analysis, 1992–2001.” Transnational Corprorations 14 (1): 1–37.Google Scholar
La Porta, Rafael, de Silanes, Florencio Lopze, Shleifer, Andrei, and Vishny, Robert. 2000. “Investor Protection and Corporate Governance.” Journal of Financial Economics 58 (2000): 3–27.CrossRefGoogle Scholar
Laeven, Luc, and Valencia, Fabian. 2012. Systemic Banking Crisis Database: An Update. Working Paper 12/163. International Monetary Fund, 1 June 2012. Available at https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Systemic-Banking-Crises-Database-An-Update-26015.Google Scholar
Lenz, Gabriel, and Sahn, Alexander. 2019. Achieving Statistical Significance with Covariates and without Transparency. Working Paper, 30 May 2019. Available at https://osf.io/p6y2g/Google Scholar
Levy-Yeyati, Eduardo, and Sturzenegger, Federico. 2005. “Classifying Exchange Rate Reigmes.” European Economic Review 49 (6): 1603–35.CrossRefGoogle Scholar
Lipsey, Robert E., and Sjöholm, Fredrik. 2004. “Foreign Direct Investment, Education, and Wages in Indonesian Manufacturing.” Journal of Development Economics 73 (1): 415–22.CrossRefGoogle Scholar
Marchick, David M., and Slaughter, Matthew J.. 2008. Global FDI Policy: Correcting a Protectionist Drift. Council on Foreign Relations.Google Scholar
Marshall, Monty G., Gurr, Ted Robert, and Jaggers, Keith. 2017. Polity IV Project: Political Regime Characteristics and Transitions, 1800–2016. University of Maryland, Centre for Systemic Peace, 25 July 2017. Available at http://www.systemicpeace.org/inscr/p4manualv2016.pdf.Google Scholar
McKinnon, Ronald I. 1973. Money and Capital in Economic Development. Washington, D.C.: Brookings Institution Press.Google Scholar
Moran, Theodore H. 2005. “How Does FDI Affect Host Country Development? Using Industry Case Studies to Make Reliable Generalizations,” 281–314. In Does Foreign Direct Investment Promote Development?, edited by Moran, Theodore H., Graham, Edward M., and Bloström, Magnus. Washington, D.C.: Institute for International Economics.Google Scholar
Mukherjee, Bumba, and Singer, David Andrew. 2010. “International Institutions and Domestic Compensation: The IMF and the Politics of Capital Account Liberalization.” American Journal of Political Science 54 (1): 45–60.CrossRefGoogle Scholar
Noorbakhsh, Farhad, Paloni, Alberto, and Youssef, Ali. 2001. “Human Capital and FDI Flows to Developing Countries: New Empirical Evidence.” World Development 29 (9): 1593–610.CrossRefGoogle Scholar
Owen, Erica. 2015. “The Political Power of Organized Labor and the Politics of Foreign Direct Investment in Developed Democracies.” Comparative Political Studies 48 (13): 1746–80.CrossRefGoogle Scholar
Pagano, Marco, and Volpin, Paolo F.. 2005. “The Political Economy of Corporate Governance.” American Economic Review 95 (4): 1005–30.CrossRefGoogle Scholar
Pandya, Sonal S. 2013. Trading Spaces: Foreign Direct Investment Regulation, 1970–2000. Cambridge, United Kingdom: Cambridge University Press.CrossRefGoogle Scholar
Pepinsky, Thomas. 2013. “The Domestic Politics of Financial Internationalization in the Developing World.” Review of International Political Economy 20 (4): 848–80.CrossRefGoogle Scholar
Perotti, Enrico C. 2014. “The Political Economy of Finance.” Capitalism and Society 9 (1).Google Scholar
Pinto, Pablo M. 2013. Partisan Investment in the Global Economy: Why the Left Loves Foreign Direct Investment and FDI Loves the Left. New York: Cambridge University Press.CrossRefGoogle Scholar
Rajan, Raghuram G., and Zingales, Luigi. 2003. “The Great Reversals: The Politics of Financial Development in the Twentieth Century.” Journal of Financial Economics 69: 5–50.CrossRefGoogle Scholar
Ross Schneider, Ben. 2013. Hierarchical Capitalism in Latin America: Busienss, Labor, adn the Challenges of Equitable Development. Cambridge, United Kingdom: Cambridge University Press.CrossRefGoogle Scholar
Scheve, Kenneth, and Slaughter, Matthew J.. 2004. “Economic Insecurity and the Globalization of Production.” American Journal of Political Science 48 (4): 662–74.CrossRefGoogle Scholar
Schwab, Dan, and Werker, Eric. 2018. “Are Economic Rents Good for Development? Evidence from the Manufacturing Sector.” World Development 112 (December): 33–45.CrossRefGoogle Scholar
Shambaugh, Jay C. 2004. “The Effect of Fixed Exchange Rates on Monetary Policy.” Quarterly Journal of Economics 119 (1): 301–52.CrossRefGoogle Scholar
United Nations Conference on Trade and Develoment. 2006. World Investment Report 2006: FDI from Developing and Transition Economies—Implications for Development.Google Scholar
United Nations Conference on Trade and Develoment. 2013. Global Value Chains and Development: Investment and Value Added Trade in the Global Economy.Google Scholar
United Nations Conference on Trade and Develoment. 2016 (April). Investment Policy Monitor.Google Scholar
Willliamson, John. 2000. “What Should the World Bank Think About the Washington Consensus.” The World Bank Research Observer 15 (2): 251–64.CrossRefGoogle Scholar
Wilson, Sven E., and Butler, David M.. 2007. “A Lot More to Do: The Sensitivity of Time-Series Cross-Section Analyses to Simple Alternative Specification.” Political Analysis 15 (2): 101–23.CrossRefGoogle Scholar
Supplementary material: PDF

Bauerle Danzman supplementary material

Bauerle Danzman supplementary material 1

Download Bauerle Danzman supplementary material(PDF)
PDF 305.3 KB