Foreign direct investment policy, domestic firms, and financial constraints

Abstract

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.

Thick as thieves? Corruption, institutional trust, and investment locations

“…FDI investors, according to the OECD (2008), may be an individual or a group of related individuals, a public or private enterprise or a group of related enterprises whether incorporated or unincorporated, a government entity, an estate, trust, a societal organization, or any combination of these. Political economy scholarship on FDI, however, usually looks at the macro-level implications on either source or target states, such as in the context of states’ openness to FDI (Baccini and Dur, 2015; Chilton et al, 2020), their domestic FDI policies (Bauerle-Dansman, 2020; Owen, 2015), or accession to international agreements (Allee and Peinhardt, 2011; Kox and Rojas-Romagosa, 2020). We follow previous works and view FDI as a relationship that takes place between states, even though shareholders may be individuals or enterprises.…”

Behind the screen: Understanding national support for a foreign investment screening mechanism in the European Union

“…When politically powerful indigenous businesses face substantial and rising financing constraints, they tend to support openness to FDI because foreign investors are a source of scarce financing. If, however, local credit conditions are relatively loose, domestic firms may prefer to limit FDI because inward investment generates increased competition in product and labor markets (Bauerle Danzman, 2020).…”

The Impact of Foreign Direct Investment Management on Economic Growth Using Multiple Linear Regression (MLR)

“…In general, FDI supports a country's preparedness and provides access to the global market, which in exchange presents innumerable opportunities for global investments and technological advancements to the economy. With increased trade can then be experienced maximal economic growth [9], [23].…”