Barriers to Foreign Direct Investment Under Political Instability

29 Pages Posted: 9 Dec 2012

See all articles by Marina Azzimonti

Marina Azzimonti

SUNY Stony Brook - Department of Economics; National Bureau of Economic Research (NBER)

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Date Written: 2007

Abstract

In this article, we describe some stylized facts about expropriation of Foreign Direct Investment (FDI) and develop a theory that relates direct and indirect forms of expropriation to the degree of political instability (the frequency at which groups alternate in power) and concentration of power (the number of powerful groups affecting policy). Lack of commitment of a government that cannot write binding contracts with multinational corporations, together with the existence of redistributive uncertainty of the amount expropriated, result in excessive expropriation. We find that, consistent with empirical work, countries that are politically stable attract more FDI because foreign investors expect lower expropriation rates. Interestingly, this result holds as long as power is concentrated between a few number of influential groups.

Suggested Citation

Azzimonti, Marina and Sarte, Pierre-Daniel, Barriers to Foreign Direct Investment Under Political Instability (2007). FRB Richmond Economic Quarterly, vol. 93, no. 3, Summer 2007, pp. 287-315. Available at SSRN: https://ssrn.com/abstract=2186613

Marina Azzimonti

SUNY Stony Brook - Department of Economics ( email )

NY 11733-4384
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierre-Daniel Sarte (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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