What Determines Political Risk?: The Role of Political Connections

• In Event: Business and the State in Developing Economies

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 often focuses 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, Ukraine and Egypt. We argue that firm-level characteristics and political connections determine the likelihood of expropriation. Using firm-level evidence, we show that expropriation risk is not uniform across all firms in an investment host country: firms lacking political connections and a credible threat of exit face higher risks compared to well-connected firms and those with viable exit options. 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

• Robert Kubinec, Princeton University

• Haillie Na-Kyung Lee, Seoul National University

• Andrey Tomashevskiy, Rutgers University