Hostname: page-component-745bb68f8f-g4j75 Total loading time: 0 Render date: 2025-01-12T09:35:52.513Z Has data issue: false hasContentIssue false
  • English
  • Français

Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment

Published online by Cambridge University Press:  24 July 2003

Nathan M. Jensen
Get access

Abstract

Foreign direct investment (FDI) is an important element of the global economy and a central component of economic development strategies of both developed and developing countries. Numerous scholars theorize that the economic benefits of attracting multinational corporations come at tremendous political costs, arguing that democratic political systems attract lower levels of international investment than their authoritarian counterparts. Using both cross-sectional and time-series cross-sectional tests of the determinants of FDI for more than 100 countries, I generate results that are inconsistent with these dire predictions. Democratic political systems attract higher levels of FDI inflows both across countries and within countries over time. Democratic countries are predicted to attract as much as 70 percent more FDI than their authoritarian counterparts. In a final empirical test, I examine how democratic institutions affect country credibility by empirically analyzing the link between democracy and sovereign debt risk for about eighty countries from 1980 to 1998. These empirical tests challenge the conventional wisdom on the preferences of multinationals for authoritarian regimes.

Type
Articles
Information
International Organization , Volume 57 , Issue 3 , Summer 2003 , pp. 587 - 616
Copyright
Copyright © The IO Foundation 2003

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.)

References

Alesina, Alberto, and Dollar, David. 1998. Who Gives Foreign Aid to Whom and Why? NBER Working Paper 6612. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Alvarez, R. Michael, Cheibub, José Antonio, Limongi, Fernando, and Przeworski, Adam. 1996. Classifying Political Regimes. Studies in Comparative International Development 31 (2)3–36.CrossRefGoogle Scholar
Barrell, Ray, and Pain, Nigel. 1999. Domestic Institutions, Agglomerations and Foreign Direct Investments in Europe. European Economic Review 43 (4–6):925–34.CrossRefGoogle Scholar
Barro, Robert J. 1990. Government Spending in a Simple Model of Endogenous Growth. Journal of Political Economy 98 (5):S 103–26.CrossRefGoogle Scholar
Barro, Robert J. 1996. Democracy and Growth. Journal of Economic Growth 1 (1):1–27.CrossRefGoogle Scholar
Barro, Robert J., and Lee, J. W.. 1993. International Measures of Schooling Years and Schooling Quality. American Economic Review. 86 (2):218–23.Google Scholar
Beck, Nathaniel, and Katz, Jonathan. 1995. What to Do (and Not to Do) with Time-Series Cross-Sectional Data in Comparative Politics. American Political Science Review 89 (3):634–47.CrossRefGoogle Scholar
Brune, Nancy, Garrett, Geoffrey, and Guisinger, Alexandra. 2001. The Political Economy of Capital Account Liberalization. Paper presented at the 97th Annual Meeting of the American Political Science Association, August–September, San Francisco, Calif.Google Scholar
Bueno de Mesquita, Bruce, Morrow, James D., Siverson, Randolph M., and Smith, Alastair. 1999. An Institutional Explanation of the Democratic Peace. American Political Science Review 93 (4):791–808.CrossRefGoogle Scholar
Bulow, Jeremy, and Rogoff, Kenneth. 1989. Sovereign Debt: Is to Forgive to Forget? American Economic Review 79 (1):43–50.Google Scholar
Cosset, Jean-Claude, and Roy, Jean. 1990. The Determinants of Country Risk Ratings. Journal of International Business Studies 21 (1):135–42.Google Scholar
Cowhey, Peter F. 1993. Domestic Institutions and the Credibility of International Commitments: Japan and the United States. International Organization 47 (2):299–326.CrossRefGoogle Scholar
De Mello, Luiz R. Jr 1999. Foreign Direct Investment-Led Growth: Evidence from Time-Series and Panel Data. Oxford Economic Papers 51 (1):133–51.CrossRefGoogle Scholar
Dunning, John H. 1981. International Production and the Multinational Enterprise. Boston: Allen and UnwinGoogle Scholar
Easterly, William J. 1999. Life During Growth. Journal of Economic Growth 4 (3):239–76.CrossRefGoogle Scholar
Fearon, James D. 1994. Domestic Political Audiences and the Escalation of International Disputes. American Political Science Review 88 (3):577–92.CrossRefGoogle Scholar
Feder, Gershon, and Uy, Lily. 1985. The Determinants of International Creditworthiness and Their Policy Implications. Journal of Policy Modeling 7 (1):133–56.CrossRefGoogle Scholar
Garrett, Geoffrey. 1998. Partisan Politics in the Global Economy. New York: Cambridge University Press.CrossRefGoogle Scholar
Garrett, Geoffrey, and Mitchell, Debra. 2001. Globalization, Government Spending and Taxation in OECD Countries. European Journal of Political Research 39 (2):145–77.CrossRefGoogle Scholar
Gaubatz, Kurt Taylor. 1996. Democratic States and Commitment in International Relations. International Organization 50 (1):109–39.CrossRefGoogle Scholar
Grossman, Gene M., and Helpman, Elhanan. 1991. Innovation and Growth in the Global Economy. Cambridge, Mass.: MIT Press.Google Scholar
Helpman, Elhanan. 1984. A Simple Theory of Trade with Multinational Corporations. Journal of Political Economy 92 (3):451–71.CrossRefGoogle Scholar
Henisz, Witold J. 2000. The Institutional Environment for Multinational Investment. Journal of Law, Economics and Organization 16 (2):334–64.CrossRefGoogle Scholar
Huntington, Samuel P. 1968. Political Order in Changing Societies. New Haven, Conn.: Yale University Press.Google Scholar
International Finance Corporation. 1997. Foreign Direct Investment. IFC Lessons from Experience Series No. 5. Washington, D.C.: World Bank.Google Scholar
Jaggers, Keith, and Gurr, Ted Robert. 1996. Polity III Regime Change and Political Authority, 1800–1994. [computer file] (study no. 6695). 2nd ICPSR ed. Ann Arbor, Mich.: Inter-University Consortium for Political and Social Research. ⟨www.icpsr.umich.edu⟩.Google Scholar
Jensen, Nathan M. 2002. The Political Economy of Foreign Direct Investment. Ph.D. diss, Yale University, New Haven, Conn.Google Scholar
Jessup, David 1999. Dollars and Democracy. Available from ⟨http://www.newecon.org⟩. Accessed 10 November 1999.Google Scholar
Lee, Sunk Hun. 1993. Relative Importance of Political Instability and Economic Variables on Perceived Country Creditworthiness. Journal of International Business Studies. 24 (4):801–12.CrossRefGoogle Scholar
Leeds, Brett Ashley. 1999. Domestic Political Institutions, Credible Commitments, and International Cooperation. American Journal of Political Science 43 (4):979–1002.CrossRefGoogle Scholar
Lipsey, Robert E. 1999. The Role of Foreign Direct Investment in International Capital Flows. NBER Working Paper 7094. Cambridge, Mass.: National Bureau of Economic Research.Google Scholar
Lucas, Robert E. 1988. On the Mechanics of Economic Development. Journal of Monetary Economics 22 (1):3–42.CrossRefGoogle Scholar
Mallampally, Padma, and Sauvant, Karl P.. 1999. Foreign Direct Investment in Developing Countries. Finance and Development 36 (1):34–37.Google Scholar
Mankiw, N. Gregory, Romer, David, and Weil, David N.. 1992. A Contribution to the Empirics of Economic Growth. Quarterly Journal of Economics 107 (2):407–37.CrossRefGoogle Scholar
Markusen, James R. 1994. Multinationals, Multi-Plant Economies, and the Gains from Trade. Journal of International Economics 16 (3–4):205–26.CrossRefGoogle Scholar
Markusen, James R. 1995. The Boundaries of Multinational Enterprises and the Theory of International Trade. Journal of Economic Perspectives 9 (2):169–89.CrossRefGoogle Scholar
Markusen, James R. 1997. Trade Versus Investment Liberalization. NBER Working Paper 6231. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Markusen, James R. 1998a. Contracts, Intellectual Property Rights and Multinational Investment in Developing Countries. NBER Working Paper 6448. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Markusen, James R. 1998b. Multinational Firms, Location and Trade. World Economy 21 (6):733–56.CrossRefGoogle Scholar
Markusen, James R., and Maskus, Keith E.. 1999a. Multinational Firms: Reconciling Theory and Evidence. NBER Working Paper 7163. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Markusen, James R., and Maskus, Keith E.. 1999b. Discriminating Among Alternative Theories of the Multinational Enterprise. NBER Working Paper 7164. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Markusen, James R., and Venables, Anthony J.. 1999. Foreign Direct Investment as a Catalyst for Industrial Development. European Economic Review 43 (2):335–56.CrossRefGoogle Scholar
McGillivray, Fiona, and Smith, Alastair. 1998. Cooperating Democrats, Defecting Autocrats. Unpublished manuscript, Yale University, New Haven, Conn.Google Scholar
McGillivray, Fiona, and Smith, Alastair. 2000. Trust and Cooperation Through Agent-Specific Punishments. International Organization 54 (4):809–24.CrossRefGoogle Scholar
North, Douglass C. 1990. Institutions, Institutional Change, and Economic Performance. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
North, Douglass C., and Weingast, Barry. 1989. Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. Journal of Economic History 49 (4):803–32.CrossRefGoogle Scholar
Olson, Mancur. 1991. Autocracy, Democracy, and Prosperity. In Strategy and Choice, edited by Zeckhauser, Richard J., 131–57. Cambridge, Mass : MIT Press.Google Scholar
Oneal, John R. 1994. The Affinity of Foreign Investors for Authoritarian Regimes. Political Research Quarterly 47 (3):565–88.CrossRefGoogle Scholar
Organization for Economic Cooperation and Development (OECD). 1995. Foreign Direct Investment, Trade and Employment. Paris: OECD.Google Scholar
Organization for Economic Cooperation and Development (OECD). 1998. Survey of OECD Work on International Investment. OECD Working Paper on International Investment 1998/1. Paris: OECD.Google Scholar
Przeworski, Adam, and Limongi, Fernando. 1993. Political Regimes and Economic Growth. The Journal of Economic Perspectives 3(3):51–69.CrossRefGoogle Scholar
Przeworski, Adam, and Limongi, Fernando. 1997. Modernization: Theories and Facts. World Politics 49 (2):155–83.CrossRefGoogle Scholar
Przeworski, Adam, Alvarez, Michael E., Cheibub, José Antonio, and Limongi, Fernando. 2000. Democracy and Development. Political Institutions and Material Well-Being in the World, 1950–1990. Cambridge: Cambridge University Press.Google Scholar
Putnam, Robert D. 1988. Diplomacy and Domestic Politics: The Logic of Two-Level Games. International Organization. 42(3):51–69.CrossRefGoogle Scholar
Rodrik, Dani. 1999. Democracies Pay Higher Wages. Quarterly Journal of Economics 14(3):707–38.CrossRefGoogle Scholar
Romer, Paul M. 1990. Endogenous Technical Change. Journal of Political Economy 98 (S):79–102.CrossRefGoogle Scholar
Rosenthal, R.W. 1991. On the Incentives Associated with Sovereign Debt. Journal of International Economics 30 (1–2):167–76.CrossRefGoogle Scholar
Ross, Michael. 2000. Does Resource Wealth Cause Authoritarian Rule? Working Paper. Washington, D.C.: World Bank.Google Scholar
Russett, Bruce, and Oneal, John R.. 2001. Triangulating Peace: Democracy, Interdependence, and International Organizations. New York: Norton.Google Scholar
Sachs, Jeffrey, and Warner, Andrew. 1995. Natural Resource Abundance and Economic Growth. NBER Working Paper 5398. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Sobel, Andrew C. 1999. State Institutions, Private Incentives, Global Capital. Ann Arbor: University of Michigan Press.CrossRefGoogle Scholar
Solow, Robert. 1956. A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics 70 (1):65–94.CrossRefGoogle Scholar
Thomas, Jonathan, and Worrall, Tim. 1994. Foreign Direct Investment and the Risk of Expropriation. Review of Economic Studies 61 (1):81–108.CrossRefGoogle Scholar
Tsebelis, George. 1995. Decision Making in Political Systems: Veto Players in Presidentialism, Parliamentarism, Multicameralism, and Mulitpartyism. British Journal of Political Science 25 (3):289–325.CrossRefGoogle Scholar
Vernon, Raymond. 1971. Sovereignty at Bay The Multinational Spread of U S. Enterprises. New York: Basic Books.CrossRefGoogle Scholar
Wang, Jian-Ye. 1990. Growth, Technology Transfer, and the Long-Run Theory of International Capital Movements. Journal of International Economics 29 (2):255–71.CrossRefGoogle Scholar
Wantchekon, Leonard. 2000. Why Do Resource-Dependent Countries Have Authoritarian Governments? Working Paper. Yale University, New Haven, Conn.Google Scholar
Wantchekon, Leonard, and Jensen, Nathan. 2000. Resource Wealth and Political Regimes in Africa. African Studies Research Working Paper. Yale University, New Haven, Conn.Google Scholar
World Bank. 1999. World Development Indicators. CD-Rom. Washington, D.C.: World Bank.Google Scholar