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How Are Autocratic Countries Able to Attract FDI? PDF

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Florida State University Libraries Electronic Theses, Treatises and Dissertations The Graduate School 2014 Credible Commitment Institutions and Foreign Direct Investment: How Are Autocratic Countries Able to Attract FDI? Chunghik Moon Follow this and additional works at the FSU Digital Library. For more information, please contact [email protected] FLORIDA STATE UNIVERSITY COLLEGE OF SOCIAL SCIENCE AND PUBLIC POLICY CREDIBLE COMMITMENT INSTITUTIONS AND FOREIGN DIRECT INVESTMENT: HOW ARE AUTOCRATIC COUNTRIES ABLE TO ATTRACT FDI? By CHUNGHIK MOON A Dissertation submitted to the Department of Political Science in partial fulfillment of the requirements for the degree of Doctor of Philosophy Degree Awarded: Spring Semester, 2014 Chungshik Moon defended this dissertation on April 8, 2014. The members of the supervisory committee were: Dale L. Smith Professor Directing Dissertation Manoj Atolia University Representative Mark A. Souva Committee Member Sean D. Ehrlich Committee Member Christopher Reenock Committee Member The Graduate School has verified and approved the above-named committee members, and certifies that the dissertation has been approved in accordance with university requirements. ii This dissertation is dedicated to God and my family: my parents who always have been my biggest supporters, my wife, Jieun, for her encouragement and willingness to support me during last six years since we first met, and to my two children, Heekwon (John) and Heejai (Noah), who are too young to know about the meaning of this dissertation, but will be proud of his father sometime in the future. iii ACKNOWLEDGMENTS Since the first day of becoming my advisor, Dale L. Smith has been an excellent teacher, friend, and mentor of me. It was his International Political Economy class which totally changed my research interest. During my graduate school years, he was the first one who told me that I would be a good scholar. My graduate school experience, publications, job, and dissertation would have been less successful without his help. A number of faculty members in the Department of Political Science at Florida State University deserve recognition here. Mark Souva, Sean Ehrlich, and Christopher Reenock agreed to be my dissertation committee members. They have been willing to read my works, give me comments, and even work with me as a coauthor. In particular, I have learned great deals from Mark Souva as a coauthor. He is one I would love to work again. I am also thankful for Christopher Reenock for reading my first year paper when I had hard time in finding an advisor. He may not remember it, but I will never forget this help. After my advisor Dale L. Smith, it is Sean Ehrlich who has read my research the most. I appreciate both Brad Gomez and Cherie Maestas for believing and supporting me for two years while I was in a job market. I also want to mention other faculty members including Quintin Beazer, Amanda Driscoll, and Jee Seon Jeon who encouraged and cheered me during my last years at FSU. I also want to recognize my graduate colleagues at FSU. I owe my cohort Daniel Hill and Thomas Croom in particular, who have read (and proofread) most of my works, and supported me both academically and even personally from the very beginning of my graduate time. My sincere thanks go to Andrea Beger, Marius Radeon, Meredith Whiteman, Eddie Hearn, Daniel Milton, Hackyoung Bae, and Hong-Cheol Kim. I always miss the time spending with them. They are the biggest asset I made at FSU. I may omit someone who deserves to be here. But if there are, it would be just because of my memory. iv TABLE OF CONTENTS List of Tables ................................................................................................................................. vii List of Figures ............................................................................................................................... viii Abstract ........................................................................................................................................... ix 1. INTRODUCTION ...................................................................................................................... 1 1.1 Question ................................................................................................................................ 1 1.1.1 The Importance of FDI .................................................................................................. 2 1.1.2 FDI and Commitment Issue ........................................................................................... 4 1.2 The Argument ....................................................................................................................... 6 2. FOREIGN DIRECT INVESTMENT, COMMITMENT INSTITUTiONS, AND TIME HORIZON....................................................................................................................................... 9 2.1 Introduction ........................................................................................................................... 9 2.2 Commitment Problem ......................................................................................................... 10 2.3 Commitment Institutions and FDI Inflows in Autocratic Countries .................................. 12 2.4 Research Design.................................................................................................................. 18 2.5 Empirical Results ................................................................................................................ 20 2.6 Conclusion .......................................................................................................................... 35 3. POLITICAL INSTITUTIONS AND FDI INFLOWS IN AUTOCRATIC COUNTRIES ...... 36 3.1 Introduction ......................................................................................................................... 36 3.2 Pseudo-Democratic Institutions in Autocratic Countries ................................................... 38 3.3 Pseudo-Democratic Institutions and FDI Inflows............................................................... 41 3.4 Research Design.................................................................................................................. 48 3.5 Empirical Results ................................................................................................................ 49 3.6 Conclusion .......................................................................................................................... 61 v 4. INTERNATIONAL COMMITMENT INSTITUTIONS AND FDI INFLOWS IN AUTOCRATIC COUNTRIES ..................................................................................................... 63 4.1 Introduction ......................................................................................................................... 63 4.2 Increasing FDI Inflows by International Commitment Institutions .................................... 66 4.3 Multiple Commitment Institutions and FDI Inflows .......................................................... 68 4.3.1 Complementary Argument........................................................................................... 69 4.3.2 Substitutive Argument ................................................................................................. 71 4.4 Research Design.................................................................................................................. 73 4.5 Empirical Results ................................................................................................................ 75 4.6 Selection Issue? ................................................................................................................... 84 4.7 Conclusion .......................................................................................................................... 87 5. CONCLUSION ......................................................................................................................... 89 APPENDIX - FOREIGN DIRECT INVESTMENT, COMMITMENT INSTITUTIONS, AND TIME HORIZON .......................................................................................................................... 94 REFERENCES ........................................................................................................................... 100 BIOGRAPHICAL SKETCH ...................................................................................................... 108 vi LIST OF TABLES Table 2.1 Time Horizon to Property Rights Institutions................................................................24 Table 2.2 Property Rights Institutions and FDI Inflows ................................................................29 Table 2.3 Time Horizon, Property Right Institutions, and FDI Inflows ........................................34 Table 3.1 Effects of Autocratic Political Institutions.....................................................................52 Table 3.2 Robustness Test - Country Fixed Effects ......................................................................56 Table 3.3 Robustness Test - Different Measures ...........................................................................58 Table 3.4 Autocratic Institutions by Regime Type ........................................................................60 Table 4.1 Interaction between Domestic and International Institutions (PCSE Model) ................77 Table 4.2 Robustness Test – Country Fixed Effects ......................................................................79 Table 4.3 Robustness Test – PCSE Model with Different Measures ............................................80 Table 4.4 Robustness Test – PCSE Model with OECD BITs and Outlier Controlling .................82 Table 4.5 Robustness Test - Heckman Selection Model (top).......................................................83 Table 4.5 Robustness Test - Heckman Selection Model (bottom) ................................................84 Table A.1 Time Horizon to Property Rights Institutions (Bootstrapped) ......................................95 Table A.2 Property Rights Institutions and FDI Inflows (Bootstrapped) ......................................96 Table A.3 Time Horizon, Property Right Institutions, and FDI Inflows (Bootstrapped) ..............97 Table A.4 Sample Countries ..........................................................................................................98 Table A.5 Descriptive Statistics .....................................................................................................99 vii LIST OF FIGURES Figure 1.1 Top 20 non-OECD FDI host countries ...........................................................................2 Figure 1.2 World FDI Inflows from 1970 to 2012 ..........................................................................3 Figure 2.1 Distribution of Property Rights over Regime type .......................................................14 Figure 2.2 Dynamic Effect of Time Horizon on Property Rights Institutions .............................26 Figure 2.3 Dynamic Effect of Property Rights Institutions on FDI Inflows ...............................32 Figure 3.1 Marginal Effects of Autocratic Political Institutions on FDI Inflows ..........................54 Figure 3.2 Marginal Effects of Property Rights Institutions on FDI Inflows ................................55 Figure 3.3 Marginal Effects of Autocratic Political Institutions on FDI Inflows (Fixed Effects) .57 Figure 3.4 Marginal Effects of Autocratic Political Institutions on FDI Inflows (ICRG) .............60 Figure 3.5 Marginal Effects Single Party Regime on FDI Inflows ...............................................61 Figure 4.1 Marginal Effects of BITs on FDI Inflows ....................................................................78 Figure 4.2 Marginal Effects of BITs on FDI Inflows (Selection Model) ......................................87 Figure A.1 CIM and ICRG (2006) .................................................................................................94 viii ABSTRACT My dissertation project examines the causes of FDI inflows in autocratic countries, attempting to answer the puzzle “Why do some autocratic countries attract more FDI inflows than others?” Given the credible commitment issue that FDI entails, institutions to protect property rights and enforce contracts are argued to be central mechanisms for attracting FDI inflows. This line of reasoning leads to the stylized conclusion that democracy has more advantages than autocracy in attracting FDI. However, we observe autocratic countries, such as China and Singapore, attracting huge amounts of FDI. This generates the puzzle. I focus on the role of domestic and international commitment institutions and how they affect FDI inflows in autocratic countries. I argue that autocratic regimes can attract FDI inflows by developing domestic commitment institutions particularly when they have long time horizons, and the credibility of the institutions is strengthened by political institutions such as autocratic legislatures and parties. I also contend that autocratic countries benefit by joining international commitment institutions such as bilateral investment treaties (BITs), but the effects of those international institutions on FDI inflows are modified by the strength of the domestic commitment institutions. Using a time-series cross- sectional design which covers autocratic countries from 1970 to 2008, I find evidence supporting the arguments. My conclusion is that market friendly and stable autocrats can attract considerable FDI inflows just as democratic countries are able to do. ix

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Since the first day of becoming my advisor, Dale L. Smith has been an . 2.3 Commitment Institutions and FDI Inflows in Autocratic Countries .
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