Firms, Political Connections and Expropriation Risk

• In Event: Firms in the Global Economy

Abstract

A growing body of research in political science and economics examines the causes and consequences of expropriation of foreign direct investment. While this research is often focused on government-level decisions to expropriate, firm-level determinants of expropriation remain unexamined: why are some firms targeted for expropriation and government predation while other firms are left unharmed? We attempt to answer this question with a unique survey of firms in Venezuela, Vietnam, Ukraine and South Korea. We argue that firm-level characteristics, political connections and bureaucratic centralization determine the likelihood of expropriation. Using firm-level evidence, we show that expropriation risk is not uniform across all firm in an investment host country: firms lacking political connections face higher risks compared to well-connected firms and those with credible threats of exit. We find that political connections moderate the effect of firms’ characteristics on expropriation risk and reduce political risk for firms that would otherwise be vulnerable to government predation.

Authors

• Andrey Tomashevskiy, Rutgers University

• Haillie Na-Kyung Lee, Seoul National University

• Robert Kubinec, Princeton University