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Democratic Governance and Multinational Corporations

Democratic Governance and Multinational Corporations. Political Regimes and Inflows of Foreign Direct Investment ~ by Nathan Jensen. Research Question. How political regimes affect FDI Inflows? Dependent Variable Net FDI Inflows Independent Variable Democracy Level. Author’s Motivation.

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Democratic Governance and Multinational Corporations

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  1. Democratic Governance and Multinational Corporations Political Regimes and Inflows of Foreign Direct Investment ~ by Nathan Jensen

  2. Research Question • How political regimes affect FDI Inflows? • Dependent Variable • Net FDI Inflows • Independent Variable • Democracy Level

  3. Author’s Motivation • “critics argue that the benefits of multinational production come with substantial costs for governments and their citizens. The need to attract FDI pressures governments to provide a climate more hospitable to foreign corporations” • Jensen p.587

  4. Argument • “I argue that once a multinational has invested in a foreign market, disinvestment of physical assets is costly. Multinationals face tremendous political risks.”

  5. Hypotheses • “The hypothesis [is] that democratic institutions are associated with higher levels of FDI inflows.” • Pg 597

  6. Research Design (4 tests) • Sample • 114 countries • 1970-1997 • Dependent variable • Measure: FDI as a percentage of gross domestic investment • Independent Variable • Democracy Level • Measure of Political Regime averages for 1990 from the Polity III data set be Jaggers and Gurr

  7. Tests • Test Set One • Estimates the effects of democratic institutions on FDI inflows in a cross-section of countries in the 1990s. • Test Set Two • Tests the relationship by using a time series cross-sectional analysis of more than 100 countries for almost thirty years.

  8. Tests • Test Set Three • Employs a Heckman selection Model to further examine the robustness of the relationship. • Final Test • Examines the causal mechanism linking democracy and FDI by examining the effects of democratic institutions on sovereign debt ratings

  9. Results • “Democratic institutions are not in efficient institutions in terms of attracting multinational corporations. There is simply no empirical evidence that [MNCs] prefer to invest in dictatorships over democratic regimes.” • Pg 612

  10. Criticisms • Too Broad – 114 countries…could have been more specific with smaller number • Too many models – 19 • Democracy rating was ambiguous • Measure of Political Regime averages for 1990 from the Polity III data set be Jaggers and Gurr

  11. Contributions • “The empirical analysis in this article develops a number of models of FDI inflows, checking the robustness of the link between democratic governance and FDI by changing the model specifications and empirical tests.” • Pg 597

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