Competing investor response to direct and indirect expropriation: evidence from the extractive sector

Abstract

Some research shows that foreign investors generally respond negatively to expropriation by host governments, and other research reveals that investors cope with expropriation. Why are there varied responses to expropriation? The nature of the obsolescing bargain—expropriation—is under-explored and measured unclearly in the political risk literature. I argue that investors respond more negatively to direct than indirect expropriation because the former is a more perceptible policy with clearer consequences for investors’ control rights, which sets up expectations for comparatively worse predatory behavior by the government in the future. Additionally, investors could have a better chance to recover and profit from all of their investments after indirect expropriation compared to direct expropriation, therefore, investors would react more negatively to the latter. I conduct first-pass testing of this prediction using an original survey experiment focusing on the oil industry and using mass public subjects. Results show that the direct expropriation treatment group was less likely to want to reinvest, and the likelihood of wanting to exit to an outside option was higher for subjects who faced direct expropriation. I supplement the experimental findings with a quantitative analysis that is inconclusive and qualitative interviews of practitioners from the oil industry that support the experimental findings.