Democratic Governance and Multinational Corporations

1
Democratic Governance and Multinational
Corporations

• Political Regimes and Inflows of Foreign Direct
  Investment
• by Nathan Jensen

2
Research Question

• How political regimes affect FDI Inflows?
• Dependent Variable
• Net FDI Inflows
• Independent Variable
• Democracy Level

3
Authors Motivation

• critics argue that the benefits of multinational
  production come with substantial costs for
  governments and their citizens. The need to
  attract FDI pressures governments to provide a
  climate more hospitable to foreign corporations
• Jensen p.587

4
Argument

• I argue that once a multinational has invested
  in a foreign market, disinvestment of physical
  assets is costly. Multinationals face tremendous
  political risks.

5
Hypotheses

• The hypothesis is that democratic institutions
  are associated with higher levels of FDI
  inflows.
• Pg 597

6
Research Design (4 tests)

• Sample
• 114 countries
• 1970-1997
• Dependent variable
• Measure FDI as a percentage of gross domestic
  investment
• Independent Variable
• Democracy Level
• Measure of Political Regime averages for 1990
  from the Polity III data set be Jaggers and Gurr

7
Tests

• Test Set One
• Estimates the effects of democratic institutions
  on FDI inflows in a cross-section of countries in
  the 1990s.
• Test Set Two
• Tests the relationship by using a time series
  cross-sectional analysis of more than 100
  countries for almost thirty years.

8
Tests

• Test Set Three
• Employs a Heckman selection Model to further
  examine the robustness of the relationship.
• Final Test
• Examines the causal mechanism linking democracy
  and FDI by examining the effects of democratic
  institutions on sovereign debt ratings

9
Results

• Democratic institutions are not in efficient
  institutions in terms of attracting multinational
  corporations. There is simply no empirical
  evidence that MNCs prefer to invest in
  dictatorships over democratic regimes.
• Pg 612

10
Criticisms

• Too Broad 114 countriescould have been more
  specific with smaller number
• Too many models 19
• Democracy rating was ambiguous
• Measure of Political Regime averages for 1990
  from the Polity III data set be Jaggers and Gurr

11
Contributions

• The empirical analysis in this article develops
  a number of models of FDI inflows, checking the
  robustness of the link between democratic
  governance and FDI by changing the model
  specifications and empirical tests.
• Pg 597