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The Politics Of Investment Partisanship: And The Sectoral Allocation Of Foreign Direct Investment

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  • PABLO M. PINTO
  • SANTIAGO M. PINTO

Abstract

This paper explores the existence of partisan cycles in foreign direct investment performance. Our theoretical model predicts that the incumbent government's partisanship should affect foreign investors' decision to flow into different sectors of the host country: pro‐labor governments would encourage the inflow of the type of investment that complements labor in production; pro‐capital governments would promote the entry of investment that substitutes for labor. Empirical evidence from a sample of Organisation for Economic Co‐operation and Development countries reveals a pattern of foreign investors' response to partisan cycles consistent with the predictions of the model. First, foreign investment systematically flows into different sectors of the host economy under left‐ and right‐leaning incumbents. Second, we find a positive correlation between foreign investment and changes in average wages under left‐leaning incumbents, but no effect on wages under right‐leaning governments.

Suggested Citation

  • Pablo M. Pinto & Santiago M. Pinto, 2008. "The Politics Of Investment Partisanship: And The Sectoral Allocation Of Foreign Direct Investment," Economics and Politics, Wiley Blackwell, vol. 20(2), pages 216-254, June.
  • Handle: RePEc:bla:ecopol:v:20:y:2008:i:2:p:216-254
    DOI: 10.1111/j.1468-0343.2008.00330.x
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    File URL: https://doi.org/10.1111/j.1468-0343.2008.00330.x
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    1. James R. Markusen & Keith E. Maskus, 2001. "Multinational Firms: Reconciling Theory and Evidence," NBER Chapters, in: Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey, pages 71-98, National Bureau of Economic Research, Inc.
    2. Zadia Feliciano & Robert E. Lipsey, 1999. "Foreign Ownership and Wages in the United States, 1987 - 1992," NBER Working Papers 6923, National Bureau of Economic Research, Inc.
    3. Markusen, James R., 2001. "Contracts, intellectual property rights, and multinational investment in developing countries," Journal of International Economics, Elsevier, vol. 53(1), pages 189-204, February.
    4. Markusen, James R & Maskus, Keith E, 2002. "Discriminating among Alternative Theories of the Multinational Enterprise," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 694-707, November.
    5. Hines, James R. (ed.), 2001. "International Taxation and Multinational Activity," National Bureau of Economic Research Books, University of Chicago Press, number 9780226341736, March.
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    Cited by:

    1. Wisniewski, Tomasz P. & Pathan, Saima K., 2014. "Political environment and foreign direct investment: Evidence from OECD countries," European Journal of Political Economy, Elsevier, vol. 36(C), pages 13-23.
    2. Avsar, Veysel, 2014. "Partisanship and antidumping," Economic Modelling, Elsevier, vol. 38(C), pages 190-195.
    3. Jemio M., Luis Carlos & Candia C., Fernando & Evia V., José Luis, 2010. "Reforms and Counter-Reforms in Bolivia," IDB Publications (Working Papers) 1121, Inter-American Development Bank.
    4. Bailey, Nicholas & Warby, Brian, 2019. "Explaining the competition for FDI: Evidence from Costa Rica and cross-national industry-level FDI data," Research in International Business and Finance, Elsevier, vol. 47(C), pages 67-77.
    5. Philipp Engler & Alexander Wulff, 2014. "Opposition to capital market opening," Applied Economics Letters, Taylor & Francis Journals, vol. 21(6), pages 425-428, April.
    6. Shouro Dasgupta, Shouro & De Cian, Enrica & Verdolini, Elena, 2016. "The Political Economy of Energy Innovation," MITP: Mitigation, Innovation and Transformation Pathways 234939, Fondazione Eni Enrico Mattei (FEEM).
    7. Lskavyan, Vahe, 2014. "Donor–recipient ideological differences and economic aid," Economics Letters, Elsevier, vol. 123(3), pages 345-347.
    8. Murillo, Maria Victoria & Scartascini, Carlos & Tommasi, Mariano, 2011. "The Political Economy of Productivity: Actors, Arenas, and Policies. A Framework of Analysis," IDB Publications (Working Papers) 1642, Inter-American Development Bank.
    9. David Lake, 2009. "Open economy politics: A critical review," The Review of International Organizations, Springer, vol. 4(3), pages 219-244, September.
    10. Pablo M. Pinto & Stephen Weymouth, 2016. "Partisan Cycles in Offshore Outsourcing: Evidence from U.S. Imports," Economics and Politics, Wiley Blackwell, vol. 28(3), pages 233-261, November.
    11. Krishna Chaitanya Vadlamannati, 2012. "Impact of Political Risk on FDI Revisited—An Aggregate Firm-Level Analysis," International Interactions, Taylor & Francis Journals, vol. 38(1), pages 111-139, January.
    12. Juan A. Bogliaccini & Patrick J. W. Egan, 2017. "Foreign direct investment and inequality in developing countries: Does sector matter?," Economics and Politics, Wiley Blackwell, vol. 29(3), pages 209-236, November.
    13. Stephen Weymouth & J. Lawrence Broz, 2013. "Government Partisanship and Property Rights: Cross-Country Firm-Level Evidence," Economics and Politics, Wiley Blackwell, vol. 25(2), pages 229-256, July.
    14. Krishna Chaitanya Vadlamannati & Artur Tamazian, 2017. "Are Left-Wing Governments Really Pro-Labor? An Empirical Investigation for Latin America," Kyklos, Wiley Blackwell, vol. 70(1), pages 129-160, February.

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