Political Investment Cycles in Democracies and Autocracies

Abstract

ABSTRACTExtant research has shown considerable interest in whether host countries’ political uncertainty impedes foreign direct investment (FDI). Building upon the scholarly consensus on the adverse impact of political uncertainty on FDI, this article demonstrates that the extent to which investment climates are unpredictable varies cyclically, on the basis of election timing in democracies and leadership turnover in autocracies. The empirical results show that in presidential democracies, FDI tends to slowly increase after an executive election and then decline as the next executive election nears. However, I find that an electoral investment cycle is not found in parliamentary democracies where election timing is irregular, less predictable, and endogenous to domestic economic conditions. I also find that a similar political investment cycle exists in autocracies not through electoral cycle but through leadership tenure cycle. The level of FDI inflows tends to be relatively low early in autocrats’ tenure when political uncertainty is high and rise as autocratic leadership tenure increases over time but eventually wane again as autocratic leadership is destabilized in the late period of power transition. The findings indicate the existence of heterogeneous political investment cycles, depending on regime type.