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  • Print publication year: 2013
  • Online publication date: March 2013

3 - Tying Hands or Exchanging Hostages: Partisan Governments, Commitment, and FDI Performance

Summary

Introduction

As discussed in previous chapters, foreign direct investment (FDI) has become an important source of revenue and foreign exchange for governments, employment opportunities for workers, and access to technology and markets for host country firms (Graham, 1996; Moran, 1999; Lipsey, 2001, 2004; Carcovic and Levine, 2005; Brown et al., 2004). Moreover, the free flow of investment capital leads to allocative efficiencies that foster growth and aggregate welfare gains for sending and receiving countries, and across the global economy. Despite the potential aggregate gains from crossborder flows of investment capital, Multinational corporations (MNCs) are often highly controversial and are the source of heated political debates. The end result is that significant variation exists in the regulatory environment offered to foreign investors across countries and over time. What explains, variation in policy toward FDI? The theory introduced in this book suggests that changes in the political influence of workers and businesses could help explain this puzzle.

Cross-country comparisons show that governments have chosen very different policies toward foreign investors. Japan and South Korea, for example, both of which are associated with pro-business governments and business-friendly economic policies, have been highly restrictive toward foreign investors, whereas Singapore, The Netherlands, and Belgium have set up foreign investor-friendly regulatory environments. In the liberalizing 1990s, numerous countries abandoned import substitution and command economic policies.