The institutional environment for international investment: Safeguarding against state sector opportunism and opportunistic use of the state

Using the microanalytic perspective of the New Institutional Economics, this dissertation develops a new model of international investment behavior. This model combines the perspectives of the institutionalist and governance branches of transaction cost theory by considering the importance of both the institutional environment of a given country and the nature of the individual economic transaction. Drawing from the spatial modeling framework of Positive Political Theory, I begin by computing a structurally-derived internationally-comparable measure of the feasibility of policy change in a given country given the number of political institutions with veto power over policy change and the distribution of political preferences both across and within those institutions. Investors facing policy uncertainty from the institutional environment are less likely to make long-term productive investments due to concerns of opportunistic hold-up by political actors and the increased profitability of rent-seeking behavior. Consistent with this hypothesis, I show that, in combination with economic and demographic variables, the objectively derived measure of political hazards is a statistically and economically significant determinant of cross-national variation in economic growth and investment in basic telecommunications infrastructure in panels of 88 and 68 countries respectively.;Next, I demonstrate that the effect of political hazards on the form of international investment varies across economic transactions. Specifically, for some transactions the presence of political hazards drives multinationals towards partnering with local firms thereby increasing domestic content and shifting the political decision calculus of the host country government away from expropriation. However, where the multinational corporation is at risk from opportunistic expropriation from its local partner (i.e. where contractual hazards are high) the hazard mitigating effect of the partnership is more than offset by the potential that the partner will, through political or other channels, expropriate the returns from the investment. This hypothesis of a differential effect of political hazards on investments with various levels of contractual hazards is supported by an econometric analysis of a sample of 1414 overseas operations of U.S. manufacturing firms. Further research will build upon this framework by examining the role of firm capabilities and assessing the relative efficacy of alternative safeguards including market and non-market strategic behavior.