Skip to main content Accessibility help
×
Home

Foreign direct investment policy, domestic firms, and financial constraints

  • Sarah Bauerle Danzman

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.

Copyright

Corresponding author

*Corresponding author: Sarah Bauerle Danzman, assistant professor, Indiana University Bloomington; Address: 155 N. Jordan Ave. Office 1013, Bloomington, IN 47405; Email: sbauerle@indiana.edu; Tel.: 812-856-9113

Footnotes

Hide All

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).

Footnotes

References

Hide All
Abiad, Abdul, Detragiache, Enrica, and Tressel, Thierry. 2010. “A New Database of Financial Reforms.” IMF Staff Papers 57 (2): 281302.
Acemoglu, Daron, and Robinson, James A.. 2008. “Persistence of Power, Elites, and Institutions.” American Economic Review 98 (1): 267–93.
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.
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.
Aizenman, Joshua. 2005. “Opposition to FDI and Financial Shocks.” Journal of Development Economics 77: 467–76.
Alfaro, Laura, and Chen, Maggie X.. 2012. “Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance.” American Economic Journal: Economic Policy 4 (3): 3055.
Alfaro, Laura, and Chen, Maggie X.. 2018. “Selection and Market Reallocation: Productivity Gains from Multinational Production.” American Economic Journal: Economic Policy 10 (2): 138.
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): 89112.
Bandelj, Nina. 2008. “Economic Objects as Cultural Objects: Discourse on Foreign Investment in Post-Socialist Europe.” Socio-Economic Review 6: 671702.
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.
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.
Brambor, Thomas, Clark, William Roberts, and Golder, Matt. 2006. “Understanding Interaction Models: Improving Empricial Analyses.” Political Analysis 14: 6382.
Chwieroth, Jeffrey M. 2010. Capital Ideas: The IMF and the Rise of Financial Liberalization. Princeton, NJ: Princeton University Press.
Cihak, Martin, Demirguc-Kunt, Ash, Feyen, Erik, and Levine, Rosee. 2012. Benchmarking Financial Systems around the World. The World Bank.
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.
Culpepper, Pepper. 2011. Quiet Politics and Business Power: Corporate Control in Europe and Japan. Cambridge, United Kingdom: Cambridge University Press.
Ernst and Young. 2017. Transactions 2017: Inbound M&A Takes the Center Stage.
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.
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.
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.
Gourevitch, Peter A., and Shinn, James. 2005. Political Power and Corporate Control: The Global Politics of Corporate Goverance. Princeton, NJ: Princeton University Press.
Gupta, Nandini. 2005. “Partial Privatization and Firm Performance.” The Journal of Finance 60 (2): 9871015.
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.
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.
Helpman, Elhanan. 2006. “Trade, FDI, and the Organization of Firms.” Journal of Economic Literature XLIV (September): 589630.
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).
International Monetary Fund. 2012. Liberalizing Capital Flows and Managing Outflows.
International Monetary Fund. 2014. Annual Report on Exchange Arrangements and Exchange Restrictions.
Irsova, Zuzana, and Havranek, Tomas. 2013. “Determinants of Horizontal Spillovers from FDI:Evidence from a Large Meta-Analysis.” World Development 42: 115.
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.
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.
Kang, C. S. Eliot. 1997. “U.S. Politics and Greater Regulation of Inward Foreign Direct Investment.” International Organization 51 (2): 301–33.
Kersting, Erasmus K., and Görg, Holger. 2017. “Vertical Integration and Supplier Finance.” Canadian Journal of Economics 50 (1): 273305.
Kobrin, Stephen J. 2005. “The Determinants of Liberalization of FDI Policy in Developing Countries: A Cross-Sectional Analysis, 1992–2001.” Transnational Corprorations 14 (1): 137.
La Porta, Rafael, de Silanes, Florencio Lopze, Shleifer, Andrei, and Vishny, Robert. 2000. “Investor Protection and Corporate Governance.” Journal of Financial Economics 58 (2000): 327.
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.
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/
Levy-Yeyati, Eduardo, and Sturzenegger, Federico. 2005. “Classifying Exchange Rate Reigmes.” European Economic Review 49 (6): 1603–35.
Lipsey, Robert E., and Sjöholm, Fredrik. 2004. “Foreign Direct Investment, Education, and Wages in Indonesian Manufacturing.” Journal of Development Economics 73 (1): 415–22.
Marchick, David M., and Slaughter, Matthew J.. 2008. Global FDI Policy: Correcting a Protectionist Drift. Council on Foreign Relations.
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.
McKinnon, Ronald I. 1973. Money and Capital in Economic Development. Washington, D.C.: Brookings Institution Press.
Moran, Theodore H. 2005. “How Does FDI Affect Host Country Development? Using Industry Case Studies to Make Reliable Generalizations,” 281314. 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.
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): 4560.
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.
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.
Pagano, Marco, and Volpin, Paolo F.. 2005. “The Political Economy of Corporate Governance.” American Economic Review 95 (4): 1005–30.
Pandya, Sonal S. 2013. Trading Spaces: Foreign Direct Investment Regulation, 1970–2000. Cambridge, United Kingdom: Cambridge University Press.
Pepinsky, Thomas. 2013. “The Domestic Politics of Financial Internationalization in the Developing World.” Review of International Political Economy 20 (4): 848–80.
Perotti, Enrico C. 2014. “The Political Economy of Finance.” Capitalism and Society 9 (1).
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.
Rajan, Raghuram G., and Zingales, Luigi. 2003. “The Great Reversals: The Politics of Financial Development in the Twentieth Century.” Journal of Financial Economics 69: 550.
Ross Schneider, Ben. 2013. Hierarchical Capitalism in Latin America: Busienss, Labor, adn the Challenges of Equitable Development. Cambridge, United Kingdom: Cambridge University Press.
Scheve, Kenneth, and Slaughter, Matthew J.. 2004. “Economic Insecurity and the Globalization of Production.” American Journal of Political Science 48 (4): 662–74.
Schwab, Dan, and Werker, Eric. 2018. “Are Economic Rents Good for Development? Evidence from the Manufacturing Sector.” World Development 112 (December): 3345.
Shambaugh, Jay C. 2004. “The Effect of Fixed Exchange Rates on Monetary Policy.” Quarterly Journal of Economics 119 (1): 301–52.
United Nations Conference on Trade and Develoment. 2006. World Investment Report 2006: FDI from Developing and Transition Economies—Implications for Development.
United Nations Conference on Trade and Develoment. 2013. Global Value Chains and Development: Investment and Value Added Trade in the Global Economy.
United Nations Conference on Trade and Develoment. 2016 (April). Investment Policy Monitor.
Willliamson, John. 2000. “What Should the World Bank Think About the Washington Consensus.” The World Bank Research Observer 15 (2): 251–64.
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.

Keywords

Type Description Title
PDF
Supplementary materials

Bauerle Danzman supplementary material
Bauerle Danzman supplementary material 1

 PDF (305 KB)
305 KB

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed