The politics of profit: A comparative political economy analysis of foreign investment, government capacity, and development spending

The purpose of this research is to analyze the political and economic arrangements of developing countries that successfully attract and utilize foreign investment for development, in comparison to countries that do not demonstrate this capacity. The research focuses on foreign investment as an element of development strategy. The conundrum is that the interests of foreign investors are divergent from the interests of host countries, which creates a disequilibrium of benefits. The theory that frames the research is that institutions can serve as corrective mechanisms to this market failure. The central argument posits that the disequilibrium can be moderated by the interaction of foreign investment with democratic and coherent institutions. Developing countries that exhibit this interaction effect are more successful at utilizing foreign investment than countries that do not. Two complementary methods are used to test the theory. Cross-Sectional Time Series is used to test the effects of political and economic variables in 147 developing countries over thirty years, 1971--2000. Comparative Case Study analysis is used to provide more in-depth analysis of the intersection between the state and foreign investment in Kenya, Nigeria, Malaysia, and Chile. The results of the Cross-Sectional Time Series analysis demonstrate that the domestic benefits are contingent on the interaction effects of foreign investment with democratic and coherent institutions. The Case Study analysis suggests that countries with the capacity to pass legislation that applies a non-discretionary tax rate, reduces performance requirements, maximizes access to markets, and maintains transparency and accountability, are the most successful at gaining revenue from foreign investment. The case studies also capture the presence of indirect benefits that are not include in the data analysis, such as increased employment and skills training. The synthesis of the results from both methods concludes that, in the case of foreign investment, poor countries must first focus on solidifying their political institutions in order to gain the capacity to subsequently utilize foreign investment for domestic development.