Local Firms, Financial Constraints, and Foreign Capital: How Domestic Business Influences Policies toward Foreign Investment. Book=length manuscript in preparation.
This book considers the conditions under which local capital may benefit from, and consequently advocate for, investment policy liberalization. In doing so, it articulates an alternative mechanism through which societies can undergo substantial economic policy reforms – one in which incumbent economic elites initiate and manage structural reforms rather than become victims of disrupted economic and political structures of power. In particular, firm preferences over openness to foreign equity investors depend on domestic financing conditions, which in turn are a function of both global forces and local politics. Because MNE entry comes with substantial risks such as higher labor costs and increased productivity pressures, well-connected domestic firms will prefer to limit access to local markets when the costs of debt financing are relatively low. However, when local environments make debt financing increasingly expensive – for example, when gov- ernments end practices of directing subsidized credit to key industries and businesses – firms will be more willing to dismantle restrictive investment policies so that they may overcome liquidity constraints with equity financing from abroad.
“American Hegemony, Global Capital Cycles, and Crises.” (with Thomas Oatley and William Kindred Winecoff) Resubmitted International Studies Quarterly.
Rapid capital movements present challenges for policymakers: if not managed successfully exposure to global capital flows can destabilize national economies and precede crisis episodes. The international political economy factors that drive global capital flows are not well understood, however. We argue that United States' share of total global capital flows powerfully impacts the probability that other countries experience capital bonanzas and resulting crises. The structural position of the United States within the global financial system drives developments in integrated world capital markets, thus placing pressures on foreign countries (particularly open emerging economies). The impact of these structural conditions is conditioned by domestic factors to determine whether countries experience capital surges and crises. We employ discrete choice models to evaluate these claims using data from 1974-2011 and find substantial support for our main hypotheses. Global capital movements, and thus the probability of crises, are powerfully influenced by actions taken at the core of a hierarchical global financial system: the cause of a systemically devastating financial crisis may be rooted in persistently large macroeconomic imbalances while the cause of smaller and more localized abnormal capital events may be caused by precisely the opposite.
“Liberalizing for Liquidity: Local Firms, Financing Constraints, and Equity Restrictions on Foreigners.” Under Review
The past three decades have witnessed a spectacular evolution in polices toward foreign direct investment (FDI) as most governments have substantially liberalized domestic rules regarding rights of establishment and have promulgated a dense network of international treaties with foreign investor protections. Whose interests do these policy innovations reflect? While existing theory suggests popular pressure drives openness, investment reforms have often been pursued in non-democratic contexts and in close consultation with domestic industry. Why would indigenous firms support liberalization, especially in capital-poor countries where standard models suggest industry has the most to lose from openness? I argue local economic elites’ policy preferences toward FDI policy are conditioned on the financing environment. When large domestic firms no longer have access to cheap credit through political connections, the need to obtain finance outweighs firms’ preferences to exclude foreign firms. Under such conditions, economic elites will pressure governments to pursue liberal FDI policy environments. Using a combination of country-level and firm level data, I find banking sector reforms are robustly associated with considerable decreases in foreign equity restrictions and that local firms face less financing constraints in jurisdictions with liberal policies toward foreign entry.
“When Investment is `Winner Take All'” (with Xander Slaski) Under Review
An enduring question in the field of international political economy is the extent to which governments retain the capacity to tax and regulate globally mobile firms. Putatively, multinational firms have increasingly credible exit options, which strengthen their bargaining leverage vis-a-vis governments that wish to attract and keep investment. We investigate the factors that may alter the bargaining strength of firms and governments and thus the extent to which states must offer generous incentives packages to attract foreign investors. Using deal-level financial incentive data, we explore the systematic covariates of state- and firm-level attributes that explain variations in incentives. We first run an initial test comparing incentives across countries in Latin America. We then compare subnational differences in deals in Brazil. In contrast to the most prominent explanation of incentives, compensation for an otherwise less attractive investment locations, we find that incentives are primarily driven by competition between states and regions for investment. However, our findings suggest that investor mobility and employment generation potential have little or mixed predictive power over investment incentive deals. This leads the conclusion that incentives reinforce inequality between investment locations, rather than allowing disadvantaged locations to catch up.
“Privatization and Public Opinion of FDI in Latin America.” (with Alissandra T. Stoyan)
Policies over privatization have the potential to powerfully influence citizens’ opinions over foreign investment. Rather than viewing policies toward FDI as distinct from other components of neoliberal reform, individuals form opinions of foreign investment in part through initial experiences with multinational firms. When reform includes large-scale privatization of infrastructure, citizens are more likely to discount benefits of foreign investment. Using data from the World Bank and Latinobarómetro in 17 Latin American countries, we test the effect of country-level experiences with privatization on opinion of FDI, controlling for individual-level factors, as well as privatization’s mediating effect on the relationship between education and support for FDI. Citizens are less likely to hold intensely favorable opinions and more likely to hold intensely negative opinions of foreign investment in countries with high levels of infrastructure privatization. While highly educated people are more likely to view FDI favorably, water and energy privations attenuate this relationship.
“Local Firms and Foreign Investors: How Domestic Industry Influences Investment Treaty Formation.”
The past three decades have witnessed a spectacular evolution in polices toward foreign direct investment (FDI) as most governments have substantially liberalized domestic rules regarding rights of establishment and have promulgated a dense network of international treaties with foreign investor protections. Whose interests do these policy innovations reflect? Workhorse political economy models of preference formation suggest liberalization of investment rules, especially in developing countries, is driven by popular pressure made more powerful through democratization. However, investment reforms have often been pursued in non-democratic contexts and in close consultation with domestic industry. Why would indigenous firms support liberalization, especially in capital-poor countries where standard models suggest industry has the most to lose from openness? I argue local economic elites’ policy preferences toward FDI policy are conditioned on the financing environment. Local firms support restrictive FDI policies when financial repression and loose global credit markets provide powerful industrial elites with access to ample credit on subsidized terms. When the domestic banking sector undergoes substantial reforms, local economic elites no longer have access to cheap credit through political connections. The need to obtain finance outweighs firms’ preferences to exclude foreign firms. Under such conditions, economic elites will pressure governments to pursue liberal FDI policy environments. I test this theory using data on bilateral investment treaty (BIT) formation. While European BITs have no right of establishment provision, US BITs do. I exploit this variation in BIT provisions to show that features of the domestic banking sector and global financing conditions influence signage of US BITs, but not of European BITs. These results suggest governments’ willingness to liberalize rights of establishment is a function of local firms financing constraints.
“Investment Incentives as Socialized Risk.”
The growth of multinational firms and a growing competition to attract them has led to incentive wars among countries and subnational units trying to benefit from large investment deals. Recent research has considered the microfoundations of local political actors’ incentives to offer such deals to firms. Critics worry that these incentive packages are distortionary at best and little more than corporate handouts that erode labor’s share of income and reduce the bargaining power of labor more generally. Boosters argue tax incentives are good fiscal bets as their cost is foregone tax receipts rather than real outlays, and that initial investments increase aggregate demand and generate increased government revenue through income taxes. I consider the ways in which tax incentives shift investment risk from firms to taxpayers, and the ways in which such schemes may have multiplier effects as incentive instability and sequential outbidding can lead to swift changes in local industrial base and employment prospects. These shifts place extra burdens on local governments to smooth consumption and provide social assistance precisely at times of quickly eroding tax bases. Thus, investment incentive competition can shift multiple classes of risk (investment, location, systemic, employment) to local governments who must manage local budget priorities in the context of higher revenue risk. Using rich data on incentives at the local level in the United States, I test whether local government debt burdens and other measures of economic fragilities are systematically related to the size of investment incentive programs.