Perilous or Predictable? Foreign Investment in Personalist Regimes

• In Event: Domestic and International Institutions and Foreign Investment

Abstract

The distribution of power between authoritarian leaders and their surrounding elites greatly influences political stability within these regimes. Some regimes experience a period of turbulence that eventually gives way to order as leaders successfully consolidate their power. Other regimes continuously undergo high levels of turmoil as leaders and elites are locked in a fight for supremacy, while still other dictatorships are quite stable as leaders inherit a set of constraints that regulates their relationship with elites. The balance of power between leaders and elites also can change radically as a result of a leader’s illness or death. How do these different forms of political instability - influenced by the relationship between authoritarian leaders and elites - affect the decisions of investors?

We examine firm-level decisions to make new investments and to cancel existing commitments in response to two common forms of political instability in dictatorships: the relatively slow process of power consolidation as a leader personalizes control of government and the sudden death or mass overthrow of a leader who had consolidated power. We distinguish firms that come from home countries that are dictatorships ruled by leaders who have consolidated power (i.e., personalized dictatorships) from firms that come from non-personalized regimes. Along the lines of Beazer and Blake (2012), we argue that firms from personalized dictatorships are more likely to invest in a host country undergoing power consolidation by its leader because these firms are familiar with the politics of this process from their experiences in their home countries, and understand how to operate within that paradigm. When political instability unfolds over time, firms that are from countries unfamiliar with personalized rule are deterred from investing by what they see: the struggle for power between leaders and elites that takes the form of purges, reshuffling of high-ranking personnel, and coup attempts. Firms originating in countries where this is normal and expected are not similarly deterred. But when faced with a sudden change - in the form of a leader’s death or mass overthrow - firms react similarly. Whether their home countries are governed by leaders who have consolidated power or not, they are slow to make new investments or to cancel existing ones. They would rather wait a short period to clear the political air before making new commitments, while sunk costs lead firms with existing investments to attempt to stay the course. We test these arguments with cross-sectional data on foreign subsidiaries, combined with country-level data on power consolidation.

Authors

• Jane Lawrence Sumner, University of Minnesota, Twin Cities

• Jennifer Gandhi, Emory University