Democratic politics in an age of globalization: The impact of political skills and institutions on barriers to foreign direct investment.

Abstract

Foreign direct investment (FDI) is a driving force behind globalization; in the last 20 years, growth in FDI flows has outpaced growth in international trade. Although developed democracies are generally open to FDI, levels of restrictions vary within and across countries because governments restrict some industries and not others. I argue that variation in barriers to FDI in developed democracies is a function of the interaction of economic and political skills and electoral rules. Because the entry of foreign firms through FDI increases competition in the market of the host country, the distributional consequences of FDI determine who supports and opposes barriers to investment. I argue that this market competition tends to set up political competition between economically skilled and unskilled labor, because inward FDI tends to benefit the former over the latter. However, the distribution of economic skills alone cannot explain the emergence of barriers to FDI. Groups that are politically skilled, that is, informed and organized, are more likely to achieve favorable policy outcomes. I expect that when economically unskilled workers are highly politically skilled, we are likely to see more barriers to investment than when they are not politically skilled. Barriers to investment are also shaped by electoral rules, which determine the extent to which politicians will cater to narrow versus broad interests. I expect that proportional representation systems will be more open to FDI overall and also that political skills play a smaller role in proportional representation systems than majoritarian ones. In analyses of barriers at the industry-level in the United States, as well overall openness cross-nationally, I find strong support for the hypothesis that the effect of economic skill on barriers to FDI depends on political skills. Furthermore, I find that countries with proportional representation have both lower overall levels of protection, and also a smaller role for political skills than majoritarian systems.