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Politics, instability, and international investment flows

  • Art Durnev

    (Henry B. Tippie College of Business, University of Iowa)

  • Ruben Enikolopov

    (New Economic School, Moscow)

  • Maria Petrova

    ()

    (Princeton University and the New Economic School, Moscow)

  • Veronica Santarosa

    (University of Michigan, Law School)

We analyze the role of political instability for the organizational form of foreign investment, whether it takes the form of a majority- or minority-owned investment. We focus on the instability generated by the change of the party in power in a democratic system, rather than on the risk of changes of political regime or expropriation risk associated with this change. In majority-owned establishments, a foreign investor retains the control and enjoys fewer agency problems, while for minority-owned investments or joint ventures domestic partners of a foreign investor can lobby the government for preferential arrangements, such as firm-specific tax breaks. Political instability decreases the payoff to political connections in the future and decreases the attractiveness of minority-owned investments. The implications of our model are supported by empirical tests.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0190.

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Length: 42 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:cfr:cefirw:w0190
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