How Are Autocratic Countries Able to Attract FDI?

118 Pages·2015·0.75 MB·English

by  Chungshik Moon

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
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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.

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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.

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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.

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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
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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

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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

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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

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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.

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