The Politics of Foreign Direct Investment: An Interactive Framework

Abstract

Recent scholarship on the political determinants of foreign direct investment (FDI) point to the importance of a government's level of political capacity. Governments with high levels of capacity, it is argued, have the political power and economic resources to carry out preferred policy objectives. This line of reasoning, however, fails to provide insight into what these policy objectives are likely to include. The present study attempts to overcome this deficiency in the literature by modeling explicitly the interactive relationship between open market policy environments and relative political capacity (RPC). We argue that governments with open market policy frameworks and high levels of political capacity send clear signals of a political environment conducive to sustained profitability. Our empirical results confirm the expected interactive relationship, providing important insight into the expected effects of open market policies and political capacity.