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Abstract
This paper analyzes the setting of a reform towards liberalization of FDI policies as a political compromise pressured by the lobbying of a domestic lobby and a foreign MNC lobby. Using a common agency model of lobbying, we show that, under specific conditions, the interest group’s influence is not distortive for a critical distribution of supporters over non-supporters of the reform. Also, our political economy framework shows that exogenous provision of information on the beneficial effects of FDI liberalization paradoxically weakens the reform process.
Highlights
In recent decades, multinational corporations (MNCs) have increased their foreign direct investment (FDI) activities worldwide and developing countries have been the main destination
Recognizing that the political economy of FDI demand has so far received less attention as opposed to the study of FDI supply, this paper has proposed a challenging analysis seeking to unify these two dimensions of FDI politics
Using a common agency model of politics, we have proposed a modelling of a reform aimed at relaxing FDI policies that account for the impact of direct lobbying of a domestic lobby and a foreign MNC lobby which compete for influencing the FDI policy process affecting firms’ market access
Summary
Multinational corporations (MNCs) have increased their foreign direct investment (FDI) activities worldwide and developing countries have been the main destination. Contrary to Hillman and Ursprung [16], Ellingsen and Warneryd [17] developed a model where the domestic industry lobby for less protection, as a high level of protection could attract more FDI aimed at avoiding trade barriers and thereby harming domestic firms. Overall, this literature has focused on the political economy of the supply of FDI inflows which represents one dimension of FDI’s politics.
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