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The political economy of FDI location: why don't political checks and balances and treaty constraints matter?

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Although the risk of expropriation for foreign direct investment (FDI) has fallen substantially since the 1970s, political risk continues to be of concern to MNCs in many countries. I ask whether domestic political checks and balances and international legal instruments that aim to protect FDI enable governments to commit credibly to avoid future policies that diminish the value of sunk FDI. Utilizing a dataset on the level of foreign activity by majority-owned US manufacturing affiliates by country and industry over 1982-98, I find no evidence that either mechanism encourages inward FDI. Socio-political stability and centrist/technocratic governments do, however, provide positive signals to foreign investors, as may efficient domestic legal systems. Generally, MNCs also pursue various coping strategies that mitigate political and policy risk even in countries with few checks and balances and without investment treaty commitments.

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en

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http://eprints.lse.ac.uk/31376/

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