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Foreign direct investment policy, domestic firms, and financial constraints

Published online by Cambridge University Press:  22 July 2019

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.

Type
Research Article
Copyright
Copyright © V.K. Aggarwal 2019 and published under exclusive license to Cambridge University Press

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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).

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