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Democratic Accountability and the Relative Obstacles to Foreign Investment

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  • McCann, Fergal
  • Dorsch, Michael
  • McGuirk, Eoin
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    Abstract

    This paper considers the relationship between democratic accountability in de- veloping countries and the policies they use to attract foreign direct investment (FDI). We isolate two policy areas that governments of developing countries use to attract FDI: the tax burden on firms and the regulatory standards within which they operate. Countries that maintain high business taxes can only attract FDI by offering a less regulated business environment, which may have associated po- litical costs. The extent to which democratic accountability constrains leaders in their tax/regulatory policy choices is our main line of analysis. The novelty of the paper is that it endogenously determines policy choices within a political economy framework that recognizes the trade-offs between attracting FDI and maintaining political control. Examination of firm-level survey data from foreign firms operating in eastern Europe and central Asian economies confirms our model's main conclusion: regulation is seen to be a relatively larger obstacle to doing business in countries with greater democratic accountability. --

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    Bibliographic Info

    Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Berlin 2011 with number 56.

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    Date of creation: 2011
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    Handle: RePEc:zbw:gdec11:56

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    1. Francesco Caselli & Tom Cunningham, 2009. "Leader behavior and the natural resource curse," LSE Research Online Documents on Economics 25430, London School of Economics and Political Science, LSE Library.
    2. Ronald B. Davies & Johannes Voget, 2008. "Tax Competition in an Expanding European Union," Working Papers 0830, Oxford University Centre for Business Taxation.
    3. Beata Smarzynska Javorcik & Mariana Spatareanu, 2005. "Do Foreign Investors Care about Labor Market Regulations?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(3), pages 375-403, October.
    4. Li, Quan & Resnick, Adam, 2003. "Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries," International Organization, Cambridge University Press, vol. 57(01), pages 175-211, December.
    5. Marina Azzimonti & Pierre-Daniel G. Sarte, 2007. "Barriers to foreign direct investment under political instability," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 287-315.
    6. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
    7. Jensen, Nathan M., 2003. "Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment," International Organization, Cambridge University Press, vol. 57(03), pages 587-616, June.
    8. Robert Barro, 1973. "The control of politicians: An economic model," Public Choice, Springer, vol. 14(1), pages 19-42, March.
    9. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
    10. Matthew A. Cole & Robert J. R. Elliott & Per G. Fredriksson, 2006. "Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 157-178, 03.
    11. Busse, Matthias, 2003. "Democracy and FDI," HWWA Discussion Papers 220, Hamburg Institute of International Economics (HWWA).
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