Politics, Instability, and Composition of International Investment Flows

44 Pages Posted: 13 Feb 2009 Last revised: 11 Dec 2014

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Ruben Enikolopov

Institute of Political Economy and Governance; New Economic School; ICREA; Universitat Pompeu Fabra; Barcelona GSE

Maria Petrova

Institute for Political Economy and Governance, Barcelona; Institució Catalana de Recerca i Estudis Avançats - ICREA; Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE); New Economic School (NES)

Veronica Santarosa

University of Michigan Law School

Date Written: November 25, 2014

Abstract

We analyze the role of political instability for the composition of foreign investment, whether it takes the form of a majority- or minority-owned investment. We focus on the instability generated by the change of the party in power rather than on the risk of changes of political regime or expropriation risk associated with this change. In majority-owned establishments, a foreign investor retains the control and enjoys fewer agency problems, while for minority-owned investments or joint ventures domestic partners of a foreign investor can lobby the government for preferential arrangements, such as firm-specific tax breaks. Political instability decreases the payoff of political connections in the future and decreases the attractiveness of minority-owned investments. The implications of our model are supported by empirical tests.

Keywords: international investment flows, political instability, FDI, majority-owned investment

JEL Classification: G15, G18, G38, K42, O43

Suggested Citation

Durnev, Artyom and Enikolopov, Ruben and Petrova, Maria and Santarosa, Veronica, Politics, Instability, and Composition of International Investment Flows (November 25, 2014). Available at SSRN: https://ssrn.com/abstract=1342169 or http://dx.doi.org/10.2139/ssrn.1342169

Artyom Durnev

University of Iowa - Henry B. Tippie College of Business ( email )

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5020 Main Library
Iowa City, IA 52242-1000
United States
(514) 398-5394 (Phone)
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HOME PAGE: http://www.artdurnev.com

Ruben Enikolopov

Institute of Political Economy and Governance ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

New Economic School ( email )

Skolkovskoe shosse 45
Moscow, Skolkovo 143026
Russia

ICREA ( email )

Passeig Lluís Companys, 23
Barcelona, 08010
Spain

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona GSE ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Maria Petrova (Contact Author)

Institute for Political Economy and Governance, Barcelona ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Institució Catalana de Recerca i Estudis Avançats - ICREA ( email )

Passeig Lluís Companys, 23
Barcelona, 08010
Spain

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

Veronica Santarosa

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

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