Less Is More: Property Rights and Dictators' Demand for Foreign Direct Investment

Abstract

Past studies in political economy have established a link between domestic property rights protection and foreign direct investment (FDI) inflows. However, the underlying mechanism remains unclear, given that foreign investors often enjoy more robust property rights protection through international arbitration under investment treaties or potential intervention by their home governments. In this article, we develop a demand-side theory of how domestic property rights affect the flow of FDI into authoritarian regimes. Specifically, dictators with weaker property rights can extract more rents through restrictive FDI policies due to their greater ability to expropriate domestic enterprises than foreign ones. As competition from foreign investors decreases domestic firms' profits, these dictators tend to impose stricter FDI regulations to maximize rent extraction, despite the potential benefits of FDI for regime stability through wage increases. Therefore, the relationship between domestic property rights and FDI is driven by dictators' demand, even if foreign investors' supply remains constant. This article advances our understanding of the determinants of economic liberalization and the effects of FDI in authoritarian regimes.

Keywords: Foreign Direct Investment, Property Rights, Dictatorship, Authoritarian Regimes, Formal Model, Game Theory