The political determinants of foreign direct investment: a firm-level analysis

Abstract

Many large-N cross-national studies claim to show that political institutions and phenomena determine where foreign direct investment (FDI) flows. In this paper, I argue that these studies tend to overemphasize statistical significance, and often neglect to assess the explanatory or predictive power of their theories. To illustrate the problem, I estimate variations of a statistical model published in an influential article on Political Risk, Institutions, and FDI. I find that none of the political variables that the authors consider account for much of the variation in aggregate FDI inflows. To ensure that this underwhelming result is not driven by misspecification or measurement error, I leverage a large firm-level dataset on the investment location decisions of thousands of multinational firms. Using non-parametric machine-learning techniques and out-of-sample tests, I show that gravity variables can help us develop very accurate expectations about firm behavior, but that none of the 31 "political determinants" of FDI that I consider can do much to improve our priors.These findings have important implications, because they suggest that governments retain some room to move in the face of economic globalization.⁰vincent.arel-bundock@umontreal.ca. I thank William R. Clark, Robert J. Franzese Jr., Andrew Kerner, Walter R. Mebane Jr., Philip B.K. Potter, several anonymous reviewers, and the Editors of II.

Labor upgrading and export market opportunities: Evidence from Vietnam

“…Other analyses suggest that foreign direct investment also could be a mechanism for rights‐related improvements, especially when multinational corporations avoid locating production in jurisdictions with questionable rights‐related records. If developing country governments are keen to attract FDI, due to its potential positive effects on wages, employment, and/or technological development, such a linkage might further incentivize upgrading (Barry et al 2013, Payton and Woo 2014; but also see Arel‐Bundock, 2017, Bodea & Ye, 2018, Garriga, 2016).…”

Good for some, bad for others: US investors and non-trade issues in preferential trade agreements

“…Secondly, scholars used aggregated FDI data. This comes with the accompanying factor of measurement errors (For details on the measurement bias see Arel-Bundock 2016;Kerner 2014;Kerner and Lawrence 2014). Among other issues discrepancies in data-collection methods across countries, ignorance of debt funded assets, and the mix-up of the direct and the ultimate owner cause wrong data at the aggregated FDI-level.…”

Complex dependence in foreign direct investment: network theory and empirical analysis

“…Second, we model dyadic FDI while most existing studies focus on aggregate FDI inflows (monadic FDI). Third, more recent studies have shown that political institutions have little explanatory power despite their statistical significance (Arel-Bundock, 2017 a ) and that the effect of regime type on FDI is industry specific (Wright and Zhu, 2018). Further research is needed to adjudicate the advantages and disadvantages of democratic institutions and how they matter to different investors.…”

“…There is a substantial amount of research that explores the relationship between democratic institutions and FDI inflows; yet empirical results to date remain inconclusive (see, e.g., Jensen, 2003; Jakobsen and De Soysa, 2006; Arel-Bundock, 2017 a ; Li et al , 2018; Wright and Zhu, 2018). We include standard polity scores as a measure of a country's level of democracy (Marshall and Jaggers, 2010).…”