Politics, instability, and international investment flows

Art Durnev, Ruben Enikolopov, Maria Petrova and Veronica Santarosa
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Art Durnev: Henry B. Tippie College of Business, University of Iowa

No w0190, Working Papers from Center for Economic and Financial Research (CEFIR)

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.

Pages: 42 pages
Date: 2012-11
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Citations: View citations in EconPapers (1)

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Working Paper: Politics, instability, and international investment flows (2012)
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