- For The Most Part Though These Studies Analyze Aggregate Fdi Data This Is A Serious Limitation For A Central Tenet O 1 (68.86 KiB) Viewed 29 times
- For The Most Part Though These Studies Analyze Aggregate Fdi Data This Is A Serious Limitation For A Central Tenet O 2 (80.47 KiB) Viewed 29 times
For the most part, though, these studies analyze aggregate FDI data. This is a serious limitation, for a central tenet of theories of multinational enterprises (MNEs) is that FDI is undertaken in different industries for different reasons (eg. Dunning 1988). Asiedu and Lien (2011) deal with some of the limitations of aggregate FDI data by evaluating whether the effect of democratic governance on aggregate FDI depends on a country's export share of natural resources, particularly of minerals and oil. However, this approach does not pro- vide results on other industries. Our approach is to use data on industry-level data on FDI outflows from the United States, which is the largest FDI source country (UNCTAD 2012). More specifically, we evaluate US FDI outflows at the industry level in a linear dynamic panel data model incorporating several widely used indexes of rights and governance. Consistent with the literature on the hypothesized effects of rights and governance on FDI (discussed in the following section), these indexes define rights and governance in terms of the competitiveness and openness of processes for selecting political leadership as well as constraints on political leadership, civil liberties regarding freedoms of speech, assembly, association, movement, and religion as well as physical integrity rights; and governance in a more administrative sense regarding corruption, the rule of law, and bureaucracy quality. As different aspects of rights and governance are argued to affect FDI through different causal channels, we apply these indexes in a way that enables us to address such specificities. To our knowledge, ours is only the second study to analyze the effects of rights and governance on industry-level FDI flows and the first to do so using these indexes. Another contribution of our study is to build on the international business and political e literature on FDI motives-particularly on Dunning (1993) and Blanton and Blanton (2009) - in an effort to more clearly articulate hypotheses of how the effects of rights and governance on FDI differ by industry. We do this by complementing Dunning and Blanton and Blanton's classification of industries with industry-level data on US MNE sales to FDI host countries and on shares of tertiary educated employees, providing measures of the extent to which these FDI in these industries is market-seeking and of the skill requirements of these industries. As for our main findings, we estimate that stronger rights and governance have positive effects on FDI at the aggregate level, consistent with most prior studies. At the industry level, we estimate larger positive effects of rights and governance on FDI for service than manufacturing industries, particularly for the information and the finance and insurance industries. We find negative, though not generally statistically significant, effects of rights and governance on FDI only for the mining and oil and gas extraction industry. Hypothesized effects of rights and governance on FDI Describing the rationale for the view that democratic governance has a negative effect on FDI, Jensen writes Authoritarian leaders can provide multinational firms with better entry deals, because of the lack of popular pressure from below, and the repression of labor unions to drive down wages (2003, 593). Also relevant for this argument are non-wage labor costs, such as social insurance contributions and payroll taxes not linked to social insurance. Drawing on a range of political science literature, Jensen counters this view by arguing that democracies may have greater credibility in their dealings with MNEs in that they are better able to assure policy stability, even in the face of more frequent changes of government. Jensen offers two reasons for this. First, democracies have a greater number of 'veto. players, the various branches of government that provide checks and balances and constrain 470 D. KUCERA AND M. PRINCIPI policy reversals. Second, democracies have higher 'audience costs, with democratic leaders more likely to be held accountable for their commitments, not just to the electorate but also to MNEs (Jensen 2003, 594, 595). Jensen (2003) emphasizes that higher audience costs' in democracies are particularly important in maintaining market-friendly policies conducive to attracting FDI. The argument is that democratic leaders who renege on commitments can be held accountable to the electorate by being replaced in future elections and to present and prospective MNEs by investments being withdrawn or not undertaken. Blanton and Blanton (2012) further argue that the notion of 'audience costs applies to MNEs, in that MNEs wish to avoid adverse nuhlicite that might result from investine in countries with renressive
470 D. KUCERA AND M. PRINCIPI policy reversals. Second, democracies have higher audience costs, with democratic leaders more likely to be held accountable for their commitments, not just to the electorate but also to MNES (Jensen 2003, 594, 595). Jensen (2003) emphasizes that higher audience costs' in democracies are particularly important in maintaining market-friendly policies conducive to attracting FDI. The argument is that democratic leaders who renege on commitments can be held accountable to the electorate by being replaced in future elections and to present and prospective MNEs by investments being withdrawn or not undertaken. Blanton and Blanton (2012) further argue that the notion of audience costs' applies to MNEs, in that MNEs wish to avoid adverse publicity that might result from investing in countries with repressive governments. In a later paper. Jensen (2008) addresses arguments that democracies may provide less policy stability, in that incumbent governments may make policy changes in an effort to influence the outcome of elections or to constrain future governments. However, Jensen's empirical analysis leads him to conclude that democracies ultimately reduce such political risk for MNEs, particularly through constraints on the executive. Li and Resnick (2003) provide an extended discussion of possible pros and cons for MNES of democratic governance in potential host countries. On the negative side, democracies may act to weaken MNEs' monopolistic or oligopolistic position, insofar as this adversely affects host country firms. The authors also argue that democracies may tailor industrial policies to counter the competitive advantages of MNEs over host country firms and may be less inclined to offer generous fiscal and financial incentives to attract MNEs. On the positive side, democracies may have greater credibility in respecting property rights, the rule of law, and the enforcement of contracts, for reasons similar to those noted by Jensen regarding the greater number of 'veto players' as well as the diversity of interests within legislatures. Jakobsen and de Soysa (2006) argue, however, that monopolistic MNEs established in a host country may thwart the entry of other MNEs, leaving the effect of democracy on FDI ambiguous in this regard. They also argue that the ability of host country firms to influence government policies - including FDI and industrial policies - is likely to be weaker in democracies, and both considerations may temper or overturn Li and Resnick's hypotheses regarding the negative effects of democracy on FDI. Human rights and specifically physical integrity rights are argued by Blanton and Blanton (2007) to be generally beneficial for attracting FDI and for other aspects of economic per- formance, on the grounds that citizens who do not fear violent government retribution are more willing to contribute their time, talents - and more importantly, their ideas - toward the economic good of their country' (146). The authors also argue that respect for physical integrity rights is conducive to educational attainment, which may in turn influence FDI. Adam and Filippaios (2007) argue for the importance of distinguishing between the effects of the civil liberties and political rights aspects of democracy on FDI. They argue that stronger political rights will have a positive effect on FDI, on that grounds that the disciplining effect of these rights results in better economic policies. The effect of civil liberties is more ambiguous, argued to be positive insofar as these rights result in a more productive workforce but negative insofar as they give rise to stronger labor unions and special interest groups. These hypotheses refer to FDI generically, but assessing the effects of rights and gov ernance as well as labor costs on FDI is further complicated because different types of FDI are undertaken for different reasons, as expressed by the distinction between vertical and horizontal FDI. For vertical FDI. goods are produced for export from, not for sale to, host 6 000 lopol