The Politics of Investment: Partisanship and the Sectoral Allocation of Foreign Direct Investment

48 Pages Posted: 5 May 2008 Last revised: 7 May 2008

See all articles by Pablo M. Pinto

Pablo M. Pinto

University of Houston

Santiago M. Pinto

Research Economist; West Virginia University - Department of Economics

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Abstract

This paper explores the existence of partisan cycles in foreign direct investment performance. Our theoretical model predicts that the incumbent government's partisanship should affect foreign investors' decision to flow into different sectors of the host country: pro-labor governments would encourage the inflow of the type of investment that complements labor in production; pro-capital governments would promote the entry of investment that substitutes for labor. Empirical evidence from a sample of OECD countries reveals a pattern of foreign investors' response to partisan cycles consistent with the predictions of the model. First, foreign investment systematically flows into different sectors of the host economy under left and right leaning incumbents. Second, we find a positive correlation between foreign investment and changes in average wages under left-leaning incumbents, but no effect on wages under right-leaning governments.

Keywords: foreign direct investment, partisan governments

JEL Classification: F21, F23, D72, D78

Suggested Citation

Pinto, Pablo M. and Pinto, Santiago M., The Politics of Investment: Partisanship and the Sectoral Allocation of Foreign Direct Investment. Economics & Politics, Vol. 20, No. 2, Available at SSRN: https://ssrn.com/abstract=1127860

Pablo M. Pinto (Contact Author)

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Santiago M. Pinto

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West Virginia University - Department of Economics ( email )

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