Theoretical Foundations for Understanding Autocratic FDI

This chapter provides a review of the major literature on the political economy of FDI and also explores literature related to the two primary independent variables explored in the book: political competition and economic elites. This literature is used to develop the foundational intuitions which are used to inform the theoretical approach to the proceeding chapters. The literature indicates that both democratic and nondemocratic states can have success in attracting FDI, but success occurs through different mechanisms. In nondemocratic states, the primary channel is through certainty over policies designed to favor investment, as opposed to the attractiveness of stronger legal and property rights in democratic states. Political competition in nondemocratic states tends to introduce uncertainty around investment policy, and the number of economic elites is also a factor which tends to result in more competition over policy and less certainty. Autocratic leaders have a tendency to use FDI as a private good, which leads to “favoritism” whereby certain types of investment are sought over others.