Democratic Institutions and Expropriation Risk for Multinational Investors
43 Pages Posted: 14 Dec 2005
Date Written: November 1, 2006
There is a renewed interest in how political risk affects multinational corporations operating in emerging markets. Much of this research has focused on the relationship between democratic institutions and flows of foreign direct investment (FDI), offering inconclusive evidence on the relationship between democracy and political risk. Yet the existing studies suffer from data problems that only allow for indirect evidence of the relationship between political institutions and political risk. In this paper I utilize price data from political risk insurance agencies to directly test how domestic political institutions affect the premiums multinationals pay for coverage against government expropriations and contract disputes. Utilizing both political risk insurance data and qualitative evidence from investors, insurers, and location consultants I find that democratic regimes reduce risks for multinational investors.
Keywords: political risk, FDI, multinational, expropriation
JEL Classification: C82, D81, F21, G22, G28, K20
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