Foreign Direct Investment and Authoritarian Stability

Abstract

This article examines how foreign direct investment (FDI) affects the likelihood of authoritarian leaders’ political survival. We argue that FDI reduces the likelihood of experiencing political challenges from elites. We present two mechanisms for this claim. First, the host governments of authoritarian regimes can use FDI for long-term private good provision, so that FDI helps them to appease elite dissents and to buy off potential elite challengers. Second, FDI mitigates a commitment problem between elites and authoritarian leadership by creating an FDI-related distributional coalition, which in turn makes political defections costly to both parties. Our empirical tests using various two-stage estimators show that FDI significantly decreases the likelihood of elite-driven authoritarian leadership failure and coup attempt.

What attracts foreign direct investment into autocratic states? Regime time horizon and institutional design

“…Next, we control for government consumption. While government interventions are generally expected to have negative effects on economic performance, governments may play an important role in attracting FDI in authoritarian regimes, where they assist FDI inflows by providing infrastructure (Bak & Moon, 2016; Barro, 1996; Lucas, 1988; Romer, 1990). We also take into account natural resource‐dependent FDI by controlling for oil rent (% of GDP).…”

“…We consider the possibility of reversal causality, where, theoretically, time horizons may be endogenous to FDI inflows. While foreign investments are not entirely controlled or owned by host governments, autocratic governments may attempt to exercise influence in shaping investment environments in order to utilise FDI income for the purpose of strengthening their regime stability (Bak & Moon, 2016). Thus, in order to address this issue, we lag all explanatory variables by one year.…”

Autocratic time horizons and the growth effect of foreign direct investment

“…For example, FDI may well promote economic growth by invigorating and expanding a host country's market, in turn inviting further FDI 11 . In addition, ATHs may be endogenous to growth from a theoretical standpoint; that is, an autocratic leader may be more likely to expect to survive in office when the country's economy is vibrant and growing, which makes the leader better equipped with fund government projects and provide patronage goods to elites in the winning coalition (Bak and Moon, 2016). Given multiple endogeneity problems, using a conventional two-stage least squares estimator also poses a daunting methodological challenge; that is, finding highly relevant and exogenous instruments for multiple endogenous variables is challenging.…”

Cooperative Autocracies: Leader Survival, Creditworthiness, and Bilateral Investment Treaties*

“…). Or it may be that economic underperformance limits the number of resources that can be distributed as rents to regime elites, raising the risk of a coup (Bak and Moon ). For some autocracies, and at some points in time, the marginal benefit from increasing takings exceeds that from promoting foreign investment.…”

“…FDI may be sufficiently steerable that profits from such investment act directly as rents to winning coalition members—for instance, foreign investors felt constrained to enter into business arrangements with the family members of higher‐ups in the Chinese Communist Party or of Indonesian dictator Suharto. To the extent these latter effects hold, our contention that BITs reduce autocratic leaders' hazard of removal is further strengthened (Bak and Moon ; Pinto and Zhu ; Zhu ).…”