Testing Policy Favoritism as a Mechanism

This chapter provides an empirical test of the mechanism linking political competition and the number of economic elites in a nondemocratic state with the degree to which FDI inflows are targeted toward particular sectors of the economy. This mechanism is hypothesized to be favoritism in the policies governing investment, used to steer the benefits of FDI inflows toward allies of incumbent leaders. The chapter hypothesizes that nondemocratic states with less political competition and fewer competing economic elites will feature more of this policy favoritism and thus feature sharper variation in investor confidence between sectors. A series of textual analysis data derived from the quarterly earnings calls of firms located in nondemocratic states is employed to measure the policy sentiment of investors in different sectors. The analysis finds a strong association between location in an unfavored sector and more negative investor sentiment, and between location in a favored sector and more positive investor sentiment. Lastly, the analysis examines how this sectoral variance is exacerbated when political competition is weak and the number of competing economic elites is low. The analysis finds a strong negative association between political competition and the size of sectoral differences in sentiment, and between the number of competing economic elites and the size of sectoral differences in sentiment.