Bauerle Danzman: Cronies, Capitalists, and Control: How the Financing Environment Shapes Firms’ Strategies over Foreign Direct Investment

ABSTRACT:

What explains liberalization of foreign direct investment (FDI)? Standard Political Economy models of deregulation argue economic liberalization occurs when incumbent firms lose political power vis-à-vis groups that generally benefit from open markets. This has led to the popularity of models that place democratization, and the empowerment of labor, at the center of explanations of economic liberalization. In the particular case of FDI, however, prominent firms have often supported openness while anti-FDI coalitions frequently consist of small firms, state-owned enterprise, and labor groups. I argue theories of political economy must do more to explain the conditions under which insiders will support regulatory reform. Movements toward FDI openness through the latter part of the 20th century can be explained as resulting from a series of economic shocks that forced governments to fundamentally reform their banking sectors and in the process reoriented local firms’ financing strategies. While politically connected domestic enterprises can easily finance operations and investment through state-subsidized loans during times of financial repression, banking sector reforms raise the cost of borrowing sufficiently to induce firms to look to equity finance. FDI, particularly in the form of joint venture, provides local firms with access to foreign capital while also allowing them to maintain private benefits to control. Using large-n statistical techniques to model FDI openness, I show support for this explanation of regulatory change.

 

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