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Politics, instability, and international investment flows

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Art Durnev & Ruben Enikolopov & Maria Petrova & Veronica Santarosa, 2012. "Politics, instability, and international investment flows," Working Papers w0190, Center for Economic and Financial Research (CEFIR).
    • Handle: RePEc:cfr:cefirw:w0190
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    1. Cao, Jerry & Julio, Brandon & Leng, Tiecheng & Zhou, Sili, 2016. "Political Turnover, Ownership, and Corporate Investment," RIEI Working Papers 2016-06, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration.

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