Investing in Violence: Foreign Direct Investment and Coups in Authoritarian Regimes

Abstract

Why do foreign investors invest in authoritarian regimes despite higher political risks? In this paper, I evaluate the relationship between foreign direct investment (FDI), coups, and political risk. I develop a formal model of leadership dynamics in authoritarian regimes and examine how the initial investment decision by foreign investors is affected by expected likelihood of coups. Using the formal model, I discriminate between diverging predictions made by the “greed” and “patronage” models of authoritarian regime dynamics. Accounting for both the “greed” and “patronage” mechanisms, I demonstrate that patronage effects predominate and that increasing FDI reduces the risk of a coup. Investors are more likely to send larger FDI amounts to authoritarian states when coup risk is high to increase the likelihood of a peaceful patronage equilibrium. Using a large-n test, I find that FDI reduces the likelihood of coups, while higher coup risk is associated with increased FDI in less mobile sectors.