Do Political Institutions Affect Foreign Direct Investment? A Survey of U.S. Corporations in Latin America

• Author: Joseph L. Staats,Glen Biglaiser
• Date: 01 September 2010
• DOI: 10.1177/1065912909331428
• Published date: 01 September 2010
• Subject Matter: Articles

Political Research Quarterly

63(3) 508 –522

© 2010 University of Utah

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DOI: 10.1177/1065912909331428

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Do Political Institutions Affect

Foreign Direct Investment? A Survey

of U.S. Corporations in Latin America

Glen Biglaiser1 and Joseph L. Staats2

Abstract

The political economy literature investigates the determinants of foreign direct investment (FDI) based largely on

aggregate data, ignoring the actual decision makers. The authors conduct a survey of U.S. chief executive officers—

the actual decision makers—of corporations that have investments in Latin America to understand FDI inflows. The

authors find that investment risk related to property-rights protection, adherence to rule of law, and an effective

court system weighed most heavily in U.S. firm preferences. The results suggest that rather than stress democracy

itself as a determining factor, researchers might better focus on the institutions found within democracies.

Keywords

foreign direct investment, property rights, rule of law, effective courts, investment security

The past two decades have seen a revival of both democracy

and foreign direct investment (FDI) in the developing

world. The similar time frame led many political econ-

omy scholars to argue that political reform and foreign

investment were no coincidence—that democratization

promoted increased FDI in the developing world (Busse

2004; Feng 2001; Henisz 2000; Jensen 2003, 2006; Li

2006a; Li and Resnick 2003). However, not all scholars

agree. Some studies find either that authoritarian regimes

are more attractive to foreign investors (Huntington

1968; O’Donnell 1978; Oneal 1994; Tuman and Emmert

2004) or that regime type makes little difference for FDI

inflows (Biglaiser and DeRouen 2006; Crenshaw 1991).

Other researchers claim that economic factors, including

macroeconomic conditions and market-oriented reforms,

are the most important FDI determinants (Rummel and

Heenan 1978; Baer and Miles 2001). Still others suggest

that security issues (such as good relations between the

host country and the home country) and geographic

proximity to the home country of the investor are key

considerations for explaining investment flows (Jones

and Kane 2005; Biglaiser and DeRouen 2007).

The different findings reached by such excellent

scholarship suggest the value of a new approach to gain

deeper insights about the factors that contribute to FDI.

Most previous studies use large data sets from the World

Bank, International Monetary Fund (IMF), and other

sources to arrive at their conclusions. Missing from these

studies, however, is information from the actual decision

makers—the foreign investors themselves. While imputing

the motivations of investors based on broad economic

and political measures is justified when there is nothing

else to go on, it seems that going directly to the source is

better for understanding investor motivations.

Our study does just that, by querying investors about

their investment priorities. In the first study, which we

are aware of, that includes questions related to political,

economic, and geographic factors, we administered a sur-

vey sent to chief executive officers (CEOs) of U.S. firms

with operations in Latin America to understand what

influences their investment decisions.1 Latin America is

an ideal setting to survey FDI determinants because not

only has the region shed many of the authoritarian orien-

tations that plagued it during the 1940s through the 1970s,

but it has also witnessed a surge in its share of world FDI

(Blonigen and Wang 2004). Moreover, FDI inflows vary

across the region, which enriches country comparisons.

To test the investment determinants presented in pre-

vious research, our survey includes questions about the

importance of macroeconomic conditions, economic

1Texas Tech University, Lubbock

2University of Minnesota, Duluth

Corresponding Authors:

Glen Biglaiser, Assistant Professor, Department of Political Science,

Texas Tech University

Email: gbiglais@yahoo.com.

Joseph L. Staats, Assistant Professor, Department of Political Science,

University of Minnesota, Duluth

Email: jstaats@d.umn.edu.