The Politics of FDI Expropriation

25 Pages Posted: 31 Jan 2016

See all articles by Marina Azzimonti

Marina Azzimonti

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

Multiple version iconThere are 3 versions of this paper

Date Written: January 29, 2016

Abstract

This paper documents that countries with low political turnover exhibit larger inflows of foreign direct investment. This correlation is rationalized with a model of redistribution, where policymakers have access to an expropriation technology that can be used to extract resources from foreign investors. The amount collected can be transferred to a specific group of people or region in the country. Different groups compete to gain control of this instrument, and face a probability of losing the power at each point in time. Since the economy has an infinite horizon, it is not optimal for any group to extract all the investment made by foreign firms, because this would reduce future investment and hence the possibility of extracting resources in the future. The greater the government instability or political turnover, the stronger the incentives to expropriate when in power. A key force driving this result is the redistributive uncertainty, since there is a possibility that no transfers will be received in the future. The mechanism is supported by the finding that investment risk (a measure that captures the degree at which the extraction technology is used) is negatively related to FDI and government stability.

Suggested Citation

Azzimonti, Marina, The Politics of FDI Expropriation (January 29, 2016). Available at SSRN: https://ssrn.com/abstract=2724740 or http://dx.doi.org/10.2139/ssrn.2724740

Marina Azzimonti (Contact Author)

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

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