Essays on the Political Economy of Openness to Foreign Direct Investment Among Developing Countries

Abstract

The three essays that comprise this dissertation examine the determinants of developing

countries’ policies toward inward foreign direct investment (FDI) in manufacturing activities, and assess their impact on foreign firms’ investment decisions. Each essay is informed by an original dataset measuring nine different types of domestic policies across 81 countries from 1972-2010. The two leading essays challenge the prevailing wisdom linking developing countries’ political institutions to their policies toward FDI. The first essay refutes the argument that autocrats face uniformly stronger incentives than democrats to protect domestic capitalowners from foreign competition, and should therefore prohibit FDI more widely. Instead, I argue that autocrats’ incentives vary across two different groups of capital-owners: those with close economic ties to the state, and private sector capital-owners that lack such ties. Whereas autocrats face stronger incentives than democrats to restrict FDI in sectors dominated by the former, they face similar incentives with respect to sectors dominated by the latter. The essay establishes this relationship empirically by demonstrating that autocrats impose more widespread entry barriers linked to state-ownership of the economy than democrats, but act similarly to democrats when it comes to requiring foreign investors to partner with domestic private sector firms. The second essay reassesses developing countries’ motivations for abandoning foreign equity limits beginning in the late 1970s. While leading work emphasizes democratization, I theorize that poor economic performance was a more proximate cause. Statistical analyses, paired with case studies of Indonesia and Mexico, strongly support this argument, while failing to demonstrate that democratization played a decisive role. The third essay documents developing countries’ across-the-board removal of barriers to FDI from the 1970s onwards in unprecedented empirical detail and assesses the extent to which foreign firms responded favorably, filling a significant gap in the literature. A careful statistical analysis strongly affirms the impact of domestic policies on foreign firms’ investment decisions, helping to explain developing countries’ success in attracting FDI beginning in the 1980s. Collectively, these essays refine scholars’ understanding of how political and economic circumstances shape developing countries’ policies toward FDI, while demonstrating unequivocally that these policies

matter to foreign firms.