Life of the party: The polarizing effect of foreign direct investment

As countries are becoming increasingly connected with one each other, it is essential to study the influence multinational firms have on political outcomes in the countries where they locate. This paper examines the effects of foreign direct investment (FDI) on party vote shares in 149 countries between 1990 and 2017. We construct a database by cataloging political parties into specific political positions. We use a measure of linguistic distance between countries to construct a novel instrumental variable using the average exchange rate of the surrounding region. With this IV, we capture the relative attractiveness of FDI in host countries. Our results indicate that increased FDI causes an increase in vote shares for right-wing parties. We also find suggestive evidence of increased left-wing support in developing countries and legislative elections. We show that more moderate parties, specifically center-right parties, generally lose vote shares as FDI increases.