The Political Determinants of Outward Investment Policy in Developing Countries

• In Event: Domestic Politics, Distributive Concerns, and Foreign Direct Investment Policy

Abstract

In this paper, I conceptualize state support for outward investment as a development strategy used by governments to accumulate technological, knowledge, and financial capital to their home countries. I argue that states support the internationalization of their firms under the presence of two main conditions. First, I argue that increasing political decentralization in the developing world has made it difficult for governments to liberalize their markets for land and labor, thereby obstructing their ability to attract capital-intensive foreign direct investment (FDI). Furthermore, the increased delegation of policy to subnational units has led to a byproduct of increased foreign direct investment, but of the labor-intensive rather than the capital-intensive variety. To test these claims linking political decentralization and inward investment patterns, I estimate an OLS fixed-effects regression using investment data from a cross-national sample of fifty emerging markets.
The second part of this paper explores the use of state finance to support the internationalization of domestic firms. Complementing previous literature on the subject, I posit that state lending to domestic firms can help firms increase their technological, knowledge, and financial capabilities through the strategic acquisition of foreign assets. Compared to governments with primarily private financial systems, I expect to find that countries with predominantly state-led financial systems have greater capacity to enact an outward investment policy. To test this argument, I examine the interaction effect of state finance and political decentralization on the dependent variable of outward investment using the same dataset as above.

Author

• Aparna Ravi