Understanding FDI Under Autocracy: Theoretical Approach

This chapter lays out the central theory of FDI which motivates the analysis contained in the rest of the book. Two primary independent variables, political competition and the relative number of economic elites, act to shape investment inflows through two primary mechanisms, which are policy uncertainty and policy favoritism. When investors have greater uncertainty over policy in nondemocratic states, investment inflows are lower. When nondemocratic leaders favor certain types of investment over others, investment inflows tend to be targeted toward specific sectors of the economy. The first hypothesis predicts that greater political competition in nondemocratic states will be associated with reduced investment inflows. The second hypothesis predicts that a larger relative number of economic elites in a nondemocratic state will also be associated with reduced investment inflows and that this effect will be particularly pronounced when political competition is also present. The third hypothesis claims that both the presence of political competition and the presence of more economic elites in nondemocratic states will result in FDI that is less concentrated to specific sectors of the economy, because autocrats are less able to enact policies designed to steer FDI inflows to benefit their allies.