Abstract
Drawing on the sociological literature of state bureaucracy, we develop a political incentive perspective on FDI inflows. We argue that political term, as a core feature of career advancement in state bureaucracy, influences the incentives of newly appointed government officials and in turn their efforts toward achieving the state’s goal of attracting FDI. Due to the mandatory retirement age which limits the career advancement, officials in their first terms perceive that they have better chances of promotion and hence have stronger incentives to work toward advancement than those continuing to serve in the current position for the following term. We test this argument by examining Chinese city government leaders and FDI inflows in their cities from 2003 to 2010, using a difference-in-differences design. The results show that first-term leaders, who are newly appointed after political turnover, attract more FDI inflows than continuing leaders. The difference is smaller when the new leaders are close to retirement, but greater if they are appointed to cities with low prior GDP performance. This study offers a new perspective on intra-country FDI variations, and extends the literature on the role of political institutions by investigating the political incentives of government officials.
Highlights
The influence of political institutions on foreign direct investment (FDI) has long been recognized
We further argue that structural features related to leaders’ incentives can moderate the impact of political term, such as mandatory retirement age and tournament competition in officials’ promotion
We explain FDI inflows by developing a new theoretical perspective based on the political incentives of government officials
Summary
The influence of political institutions on foreign direct investment (FDI) has long been recognized. Political institutions that impose few checks and balances on government officials’ discretion can generate high political risk and deter FDI (Henisz, 2000; Jensen, 2003; Kobrin, 1979), while changes in political leadership at the national and local government levels can lead to policy discontinuity and volatility, which negatively affect foreign investors (Fails, 2014; Henisz & Delios, 2004; Jamison, Rosenbaum, & Carter, 2017; Vaaler, Schrage, & Block, 2005). We examine how the political career-based incentives of government officials affect the level of FDI flowing into their administrative areas. Based on the sociological literature that examines state bureaucracy, we identify political term, defined as the tenure of an official at a certain level on the career ladder, as an institutional feature that influences officials’ political incentives. Officials who remain at the same level for a second term or more have fewer opportunities and incentives for promotion, and are less inclined to achieve the state’s objectives
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