Browsing by Subject "Foreign direct investment"

This dissertation consists of two essays in international macroeconomics. In the first essay I explore the role of portfolio diversification in explaining the distribution of foreign investment across countries. I do so by adopting a portfolio allocation approach to risk, that is widely used in empirical finance, to complement more traditional analyses of foreign capital flows across countries. I capture the portfolio diversification motive by a measure of country-specific riskiness, "covariance risk", which I construct as how countries' growth rates covary with the stochastic discount factor of a representative international investor. The idea is to capture the extent to which investments in a foreign economy provide a hedge against the investor's overall risk. My key new empirical finding is a strong and significant correlation between this new measure of country riskiness and foreign investment allocations. Less risky countries, i.e countries whose growth rates are more highly correlated with the investor's stochastic discount factor, receive larger investment shares than more risky countries. I interpret this result as evidence that investors do take into account diversification opportunities not only for portfolio investment decisions but also for foreign direct investment decisions. My empirical results confirm the theoretical predictions of standard portfolio allocation models.

In the second essay I explore the business cycle regularities of low-income countries in comparison to those observed in middle- and high-income countries. The data reveals several distinguishing features of the business cycle in low-income countries compared to the other two income groups: acyclical trade balances; highest volatility of consumption relative to output; highest volatility of debt; highest average debt-to-output ratio and lowest average savings ratio; significant negative correlation between domestic saving rates and the net foreign asset position. My main finding is that a small open economy model with both trend and transitory shocks to productivity, and varying intertemporal elasticity of substitution, motivated by subsistence consumption theories, can be used to account for the distinguishing features of the three income groups. The theoretical model shows that while both permanent shocks and transitory fluctuations around the trend are important sources of fluctuations in low-income countries, temporary shocks play a predominant role. In comparison to the other two income groups the volatility of the temporary shock for the low-income countries is more than three times higher than that for the high-income group and twice as large as that for the middle-income group. The same pattern holds for the permanent shock.

A foreign direct investment (FDI) project can only materialize with the consent of both the multinational corporation (MNC) and the host country. However, the literature on FDI has focused only on the preference of MNCs, assuming that all countries are eager to receive FDI. Through various case studies, I show that countries have varied and strategic preference, playing a substantial role in determining where FDI locates. Failing to recognize this two-sided matching nature of the FDI market, not only do existing models of FDI produce wrong estimates of MNCs' preference, they also prevent us from investigating countries' preference. I introduce the two-sided matching model, investigate properties of the model, and apply it to study Japanese FDI in Southeast Asia. I show how to estimate the preference of both MNCs and countries for one another, modeling the two-sided matching process behind FDI location that scholars have always known but never been able to study quantitatively. With this model, scholars can better understand of what drives FDI location and policy makers can better simulate FDI movement under hypothetical policy changes.

Ostensibly, BITs are the ideal international treaty. First, until just recently, they almost uniformly came with explicit dispute resolution mechanisms through which countries could face real costs for violation (Montt 2009). Second, the signing, ratification, and violation of them are easily accessible public knowledge. Thus countries presumably would face reputational costs for violating these agreements. Yet, these compliance devices have not dissuaded states from violating these agreements. Even more interestingly, in recent years, both developed and developing countries have moved towards modifying the investor-friendly provisions of these agreements. These deviations from the expectations of the credible commitment argument raise important questions about the field's assumptions regarding the ability of international treaties with commitment devices to effectively constrain state behavior.

Building independent courts is a commitment by political leaders that they are willing to tie their hands, restrain their (often arbitrary) power, and respect judicial decisions even if the courts rule against them. But if political leaders are rational, why do they persist in their respectful behavior towards independent courts even when such courts may prove adverse to themselves? In other words, how can judicial independence be credibly maintained without being eroded by political leaders? In this dissertation, I seek to answer this important but underexplored question in comparative judicial politics by examining the political and economic conditions necessary to maintain judicial independence in autocracies and democracies.

In Chapter 2, I build a theory regarding the methods by which autocrats credibly still maintain judicial independence, given the lack of formal institutions capable of constraining their ever-present chance of reneging. I develop a causal mechanism by which a regime’s economic reliance on foreign direct investment (FDI) and autocrats’ concern about their reputation interact to create strong and ongoing incentives to maintain judicial independence as a property rights assurance for foreign investors. Using panel data covering a large sample of authoritarian countries during the post-Cold War period, I find quantitative evidence of my theoretical expectation in Chapter 3, and demonstrate that a regime’s past reliance on FDI is positively and significantly associated with the current level of judicial independence. My empirical analysis further indicates that the theorized effect is restricted to the economic dimension of judicial independence, in both the medium term and the long term, and that the effect is also contingent on the type of authoritarian regime that is present in the country.

In Chapter 4, I present a modified version of the so-called insurance theory and claim that the impact of political competition on judicial independence in democracies fits a slight modification I suggest to this theory. Adopting insights from party politics literature, I argue that, beyond mere electoral closeness, the presence of “robust” political competition is conducive to generating the incumbent’s credible perceptions of threats of the loss of his power and thus this form of competition is more relevant for anchoring the logic of the insurance theory. To illustrate the significance of robust political competition and the conditions thereof, I conduct a qualitative case study of South Korea and the Philippines, which differ in the level of judicial independence despite their similar degree of electoral closeness after democratization. Drawing on each country’s political history, descriptive data, and the specific episodes of judicial independence in both countries, I find that the existence of robust political competition, backed by an institutionalized party system and a stable set of robust actors, has allowed South Korea to develop judicial independence consistent with the insurance logic. By contrast, the absence of robust political competition in the Philippines, which is attributable to a fluidic and clientelistic party system with a lack of robust opposition, has discouraged incumbents from taking advantage of judicial independence as a form of political insurance for themselves.