Targeted FDI in Nondemocratic States: Empirical Findings

This chapter lays out a hypothesis of foreign direct investment (FDI) “targeting” in nondemocratic states, or the degree to which autocrats use investment policy to reward allies in favored sectors. This chapter argues that autocrats are particularly likely to favor investment into technology obsolescing, rent-generating sectors such as manufacturing or complex mineral extraction, and are less likely to favor investment into human-capital-intensive sectors that generate fewer state rents and require more information flow, such as the service sector industry. The condition where investment into one sector is heavily favored is referred to as “targeted FDI.” This chapter provides an empirical test of the hypothesis that greater political competition in nondemocratic states will be associated with less targeted FDI inflows to that state. This chapter also provides an empirical test of the hypothesis that a greater number of competing economic elites in a nondemocratic state will have the same effect and that this effect will be larger when greater political competition is also present. It also explores an illustrative case study using the example of Madagascar in the period since 2009.