Domestic coalitions and the political economy of foreign direct investment

This dissertation project seeks to explain why countries adopt different regimes towards FDI and how these regimes change over time. Contrary to a vast body of literature in political science I argue that labor-based governments will welcome foreign investment, while governments catering to domestic business interests will oppose it. The broad paradigms that dominate the study of internationalization of the world economy suffer from a great weakness: they tend to neglect the interests of political actors or assume away their political strength. My predictions are derived from a formal model that parallels the intuition from the Hecksher-Ohlin framework, which assesses the distributional consequences of factors flows. Inflows of capital---of which FDI is one form---are likely to affect the return to factors of production: they decrease the return to capital and increase the return to labor. Since owners of those factors will organize politically in defense of their sources of income, I predict that domestic capital will oppose FDI, while labor will welcome it. The plausibility of this argument is assessed using a variety of statistical models and qualitative evidence. The statistical analyses are conducted on data from developing and developed countries. The qualitative analysis is based on a structured comparison of Argentina and South Korea in the post-war era. These two cases are chosen based on variation on the patterns of labor and capital influence in politics. The quantitative and qualitative evidence seem to support my thesis: investment regimes and investment outcomes covary with the type of domestic coalition in power in the host country. Governments that cater to labor interests tend to be friendlier towards foreign investors, while those that cater to business interests tend to be more hostile. The corollary is that countries with labor-based coalitions receive more foreign direct investment than those countries whose ruling coalitions are built around domestic capital. The theory and subsequent findings capture part of the large variance in the level of foreign investment that countries receive that remains unexplained in the extant literature in economics and political science.