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Attracting FDI in a Politically Risky World


  • Eckhard Janeba


Conventional wisdom holds that lack of government commitment deters foreign investment in developing countries. Yet this explanation is not convincing because some econometric studies have found little support for the role of political risk and host governments can offer upfront subsidies that compensate foreign investors for their sunk cost. This paper shows that a second commitment problem upsets the argument. A multinational firm cannot credibly commit to invest in only one country. Since countries differ in production costs and government credibility, this paper explains the pattern of investment in a politically risky world.

Suggested Citation

  • Eckhard Janeba, 2001. "Attracting FDI in a Politically Risky World," NBER Working Papers 8400, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8400
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    Cited by:

    1. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers 2009/37, Institut d'Economia de Barcelona (IEB).
    2. repec:bla:stratm:v:38:y:2017:i:2:p:203-231 is not listed on IDEAS
    3. Lessmann, Christian, 2013. "Foreign direct investment and regional inequality: A panel data analysis," China Economic Review, Elsevier, vol. 24(C), pages 129-149.
    4. Frank L. BARTELS & Markus EICHER & Christopher BACHTROG & Gorazd REZONJA, 2009. "Foreign Direct Investment In Sub-Saharan Africa: Changing Location-Specific Advantages As Signals Of Competitiveness," The Developing Economies, Institute of Developing Economies, vol. 47(3), pages 244-278.
    5. Aisbett, Emma, 2007. "Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt72m4m1r0, Department of Agricultural & Resource Economics, UC Berkeley.
    6. Chor, Davin, 2009. "Subsidies for FDI: Implications from a model with heterogeneous firms," Journal of International Economics, Elsevier, vol. 78(1), pages 113-125, June.
    7. Hemmer, Hans-Rimbert & Krüger, Ralf & Seith, Jennifer, 2006. "Ausländische Direktinvestitionen: Flankierende Maßnahmen des Staates," Discussion Papers in Development Economics 36, Justus Liebig University Giessen, Institute for Development Economics.
    8. Luis Araujo & Paulo Arvate, 2016. "Institutional quality and capital taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 25-47, February.
    9. John Ahlquist & Aseem Prakash, 2010. "FDI and the costs of contract enforcement in developing countries," Policy Sciences, Springer;Society of Policy Sciences, vol. 43(2), pages 181-200, June.
    10. Dong, Quan & Bárcena-Ruiz, Juan Carlos, 2015. "Does investment in capacity encourage FDI?," Economic Modelling, Elsevier, vol. 51(C), pages 58-64.
    11. Kazunobu Hayakawa & Hyun-Hoon Lee & Donghyun Park, 2014. "Are Investment Promotion Agencies Effective in Promoting Outward Foreign Direct Investment? The Cases of Japan and Korea," Asian Economic Journal, East Asian Economic Association, vol. 28(2), pages 111-138, June.
    12. Pierre-Guillaume Méon & Khalid Sekkat, 2007. "Revisiting the relationship between governance and foreign direct investment," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 41-61.
    13. Straub, Stephane, 2008. "Opportunism, corruption and the multinational firm's mode of entry," Journal of International Economics, Elsevier, vol. 74(2), pages 245-263, March.
    14. Witold J. Henisz & Bennet A. Zelner & Mauro F. Guillen, 2004. "International Coercion, Emulation and Policy Diffusion: Market-Oriented Infrastructure Reforms, 1977-1999," William Davidson Institute Working Papers Series 2004-713, William Davidson Institute at the University of Michigan.
    15. Yury Zaytsev, 2016. "Diagnostics of foreign direct investments inflow in Russian Federation: theoretical and practical issues," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, vol. 9(2), pages 170-181.
    16. Katz, Barbara G. & Owen, Joel, 2006. "Should governments compete for foreign direct investment?," Journal of Economic Behavior & Organization, Elsevier, vol. 59(2), pages 230-248, February.
    17. Lahimer, Noomen, 2009. "La contribution des investissements directs étrangers à la réduction de la pauvreté en Afrique subsaharienne," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/1167 edited by Goaied, Mohamed & Bienaymé, Alain, April.
    18. Natalia Kovrijnykh, 2008. "Debt Contracts with Short-Term Commitment," 2008 Meeting Papers 558, Society for Economic Dynamics.
    19. Lars P Feld, 2004. "On Tax Competition: The (Un-)Expected Advantages of Decentralized Fiscal Autonomy," Marburg Working Papers on Economics 200425, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    20. Janeba, Eckhard, 2004. "Global corporations and local politics: income redistribution vs. FDI subsidies," Journal of Development Economics, Elsevier, vol. 74(2), pages 367-391, August.
    21. Hsiao, Frank S. T. & Hsiao, Mei-Chu W., 2004. "The chaotic attractor of foreign direct investment--Why China?: A panel data analysis," Journal of Asian Economics, Elsevier, vol. 15(4), pages 641-670, August.
    22. Dieter M. Urban, 2006. "Multilateral Investment Agreement in a Political Equilibrium," CESifo Working Paper Series 1830, CESifo Group Munich.
    23. Kaushal Kishore, 2016. "Tax Competition, Policy Competition and the Strategic Use of Policy Restrictions on Foreign Direct Investments," Working Papers 201684, University of Pretoria, Department of Economics.

    More about this item

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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