Capitalists or Workers? How FDI Affects Democratization Prospects

• In Event: International Influences on Democratization

Abstract

How does the level of potential Foreign Direct Investment (FDI) and its restrictions by dictators affect prospects for democratization? Why did capitalists play a significant role in some of the early democratization movements of mainly Western European countries, while they are conspicuously absent in almost all of the third wave countries’ democratization movements? This paper argues that these two questions are closely related. As the industries in the country face increasingly more competition from potential foreign entrants (higher level of potential FDI), workers are more likely to support democratization due to the larger wage benefits from free flow of FDI under democracy, while capitalists are less likely to support democratization due to their increasing need for protection from the authoritarian regime in the form of FDI restrictions. Thus, as cross-border investment becomes increasingly frictionless, workers are more willing to fight for democratization than capitalists. However, the effect of higher level of potential FDI on democratization prospects is ambiguous, as it does not only increase workers’ incentive to revolt, but also increase the dictator’s resistance to democratization due to the larger share of rents they can extract from capitalists in exchange for protection. Empirical evidence in the form of both large-N regressions and small-N case studies are provided to support the theory.

Author

• Jacque Gao, University of Rochester