Foreign direct investment, political risk and the limited access order

Abstract

ABSTRACTThe common explanations for political risk in foreign investment focus on the opportunism of host-country governments. However, when governments are too weak to regulate and effectively control them, domestic business elites may also cause political risk. In the literature on political risk, the host state is mostly modelled as a single, cohesive actor and elites outside of the government are not taken into account. By contrast, this paper conceptualises political risk as a lack of government assertiveness vis-à-vis domestic business elites, drawing on the limited access order (LAO) concept developed by Douglass North and his co-authors. It presents the case of Swedish Tele2’s investment in Russia. The mobile telecommunications provider was highly successful in Russia until it became a threat to the business interests of three Russian oligarchs. Regulatory agencies in Russia lacked the necessary authority to provide a level playing field in the telecommunications industry. They did not intervene when Tele2’s access to vital licenses was blocked by competitors, effectively squeezing the Swedes out of the Russian market. This paper concludes that in LAOs foreign investors are initially welcome, but political risk is high when the market competition with domestic elites becomes intense.