Tags: Political Economy, Development

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.

Tags: Political Economy, Networks And Politics

What factors generate financial fragility in open economies? Existing research assumes that the development of these conditions is more likely to emerge under some configurations of domestic economic and political attributes. We examine the development of financial fragility through the ontological lens of the new interdependence approach, which assumes that global factors can be as important as local factors in generating outcomes. We analyze global financial conditions from 1978 to 2009 and argue that contemporary global finance is an oscillating system that generates boom and bust capital flow cycles. The phases of this cycle are a consequence of the scale of US net borrowing on global markets: when the United States is a large net importer of foreign capital, other economies struggle to attract foreign capital and are substantially less likely to develop fragile financial positions; when US net capital imports fall, other economies receive an abundance of foreign capital, and financial fragility becomes more likely. In contrast, we find little evidence that cross-national variation in political institutions or financial systems explains why fragility develops, although some regional interdependencies are evident. We conclude that global conditions drive the probability of crises occurring someplace in the system, while local outcomes appear to be idiosyncratic.

Tags: Political Economy, International Law & Organization, Development

Under what conditions can governments use international commitments such as Bilateral Investment Treaties (BITs) to attract foreign direct investment (FDI)? Although numerous studies have attempted to answer this question, none considers how investment treaties may have heterogeneous affects across industry. I argue BIT effect is strongest when the obsolescing bargaining problem between firms and governments is most protracted, namely, when FDI relies on strong contracts between firms and states. Using a time series cross-sectional data set of 114 developing countries from 1985 to 2011, I find BITs are associated with increases in infrastructure investment, an industry particularly reliant on the sanctity of government contracts, but not with total FDI inflows. Moreover, BITs with strong arbitration provisions display the strongest statistical effect on infrastructure investment, while BITs that do not provide investors with such protections are not associated with increased investment. My results have implications for both scholarship on the relationship between governments and multinational firms as well as for the study of international institutions more broadly. To properly ascertain the effects of international treaties and institutions, scholars should consider not just whether institutions constrain or inform—or matter at all—but also the extent to which the targets of institutions have heterogeneous responses to them.

Tags: Political Economy, Networks And Politics, Research Methods & Research Design

Although the subprime crisis regenerated interest in and stimulated debate about how to study the politics of global finance, it has not sparked the development of new approaches to International Political Economy (IPE), which remains firmly rooted in actor-centered models. We develop an alternative network-based approach that shifts the analytical focus to the relations between actors. We first depict the contemporary global financial system as a network, with a particular focus on its hierarchical structure. We then explore key characteristics of this global financial network, including how the hierarchic network structure shapes the dynamics of financial contagion and the source and persistence of power. Throughout, we strive to relate existing research to our network approach in order to highlight exactly where this approach accommodates, where it extends, and where it challenges existing knowledge generated by actor-centered models. We conclude by suggesting that a network approach enables us to construct a systemic IPE that is theoretically and empirically pluralist.

Tags: Political Economy, Development

Why do government open their economies to multinational firms? Some argue democratic forces lead to openness, but many citizen groups view multinational business with suspicion. Moreover, investment policies are complex and often countervailing – governments often simultaneously liberalize some components of FDI rules while tightening others. In Merging Interests, Sarah Bauerle Danzman demonstrates that large domestic firms often drive foreign investment policy. Firm preferences over openness to foreign equity investors depend on domestic financing conditions. Because MNE entry comes with substantial risks, well-connected domestic firms prefer to limit access to local markets when the costs of debt financing are relatively low. When local environments make debt financing increasingly expensive, firms are more willing to dismantle restrictive investment policies in order to overcome liquidity constraints. Consequently, governments liberalize FDI to provide large domestic firms with access to global financing channels. Evidence includes quantitative analysis and case studies of Malaysia and Indonesia.

This chapter provides a synthetic and critical review of political economy research related to bilateral investment treaties (BITs) and their effect on patterns of FDI flows. BITs arose in the aftermath of decolonization and are now the primary instrument of international diplomacy and law that regulates rules regarding the treatment of foreign investors in domestic jurisdictions. Fundamentally, these treaties represent attempts to overcome hold up problems that inhibit investment by committing host governments to a list of protections for foreign firms and providing an arbitration mechanism through which to adjudicate and remedy any investor-state disputes. As empirical research has largely called into question the size of the positive effects of BITs on investment, and has uncovered potentially large economic, political, and reputational costs of such treaties, many scholars have come to see BITs as deeply problematic legal tools that grant far reaching rights to foreign investors at the expense of governments and local populations. At the same time, increasing availability of FDI data disaggregated by industry and balance sheet components, as well as new tools for surveying multinational investors, has the potential to ascertain more precisely the conditions under which BITs may be useful and even necessary instruments to attract development-oriented investment.