Global Corporations and Local Politics: A Theory of Voter Backlash

Host governments often display two types of behavior toward outside investors. At an initial stage they eagerly compete for production facilities by offering subsidy packages, but often reverse these policies at a later point. In contrast to the literature that explains the behavior as a result of a hold-up problem, this paper argues that policy reversals are the result of a change in the policy choice or identity of the policy maker. Voters disagree over the net benefits of attracting corporations because of a redistributional conflict. Economic shocks change who is policy maker over time by affecting (i) the number of people who support the corporation, (ii) the incentive of an opponent of the firm to become a candidate, and (iii) the opponent's probability of winning the election against a proponent. The paper shows also that societies with more skewed income distributions are less likely to attract outside investment. While the interpretation of the model is cast in the context of foreign investment, the model has more applications and can be seen as a general theory of voter backlash.