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Foreign Direct Investment and Its Politics in Latin America

Summary and Keywords

The open economic policies Latin American countries adopted in the wake of the debt crisis of the early 1980s were expected to bring a variety of benefits. Trade liberalization and privatization make domestic firms more competitive, and deregulation helps to create an efficient business climate. Notably, such policies are also likely to spur foreign investment seeking new opportunities, and Latin American countries did indeed begin to see large inflows in the 1990s. Foreign direct investment (FDI) is thought to be particularly complementary to economic development. Compared to portfolio investment in stocks and bonds, FDI consists of the construction or purchasing of physical assets including manufacturing facilities, retail outlets, hotels, and mines. FDI should spur local economic activity and bring with it jobs and technology transfers. Furthermore, because divestment takes planning and time, direct investment is relatively long-term, so investors are expected to display greater commitments to the economic and political futures of their hosts.

As a result of these substantial potential benefits, a body of scholarship has emerged to try to understand the political dynamics of FDI. Is investment more likely to flow to democratic or authoritarian regimes? Are direct investors seeking countries with few labor protections and weak environmental regulations or are they attracted to public investments in human capital? Do they eschew governments with poor human rights records or do they see abusers as potential partners in managing a compliant workforce? What are the effects of FDI flows on the political contexts of their hosts? Among others, these questions have received significant scholarly attention, and while we have learned a great deal about the behavior and effects of FDI, considerable potential remains. Having received massive inflows averaging more than $100 billion between 2000 and 2017 and consisting of countries with broadly similar development trajectories, Latin America offers a rich landscape for such analysis. In particular, finer-grained examinations of FDI to Latin American countries can help us understand how it might affect political systems and which types of investment best complement national development projects. In so doing, studies of FDI flows to Latin America are poised to make major contributions to the fields of international political economy, development studies, and comparative politics.

Keywords: foreign direct investment, FDI, Latin America, Latin American politics, democratization, race to the bottom, development

As Latin American countries shifted away from the inwardly focused economic approaches that dominated the mid-20th century toward outward-oriented policies associated with the Washington Consensus in the 1980s and 1990s, a principal benefit was expected to be the attraction of foreign direct investment (FDI). During the former period of import substitution industrialization (ISI), a significant portion of FDI flowed to the region to manufacture products for domestic markets that were otherwise inaccessible due to high trade barriers. In a strategy referred to as “tariff jumping,” multinational corporations (MNCs) would construct facilities inside of countries to produce goods primarily for that single market. In contrast, lower investment restrictions and trade liberalization meant that investors could pursue a much wider range of opportunities, including manufacturing for export, commodity production, and the provision of domestic services. In a region with relatively scarce domestic capital, the returns to investors should be high, and a surge of FDI was expected to spur economic growth and development.

Not all types of investment are equal complements to such a development project. “Portfolio” investment in stocks and bonds could certainly create liquidity in local capital markets and provide opportunities for domestic entrepreneurs. However, it brings with it risks associated with speculative bubbles and high volatility. In contrast, “direct” investment takes the form of the purchasing or construction of hard assets such as hotels, retail outlets, and manufacturing facilities. These investments should be less fickle because divestment requires time, planning, and willing buyers. Moreover, the longer-term nature of FDI is thought to make investors more concerned with the economic, social, and political futures of their hosts.

As a result of the prominence of the role of FDI in liberal development models and this rich set of potential direct and indirect benefits, scholars have focused a great deal of attention on a wide range of possible determinants of this type of foreign investment. This article surveys the literature that has emerged to examine the causes and consequences of FDI flows to countries in the developing world and Latin America, and it identifies some of the challenges and opportunities for future study. The wide scope of scholarship on the politics of FDI is indicative of its potential to illuminate a broad array of political phenomena. Studies of foreign investment in Latin America in particular carry the potential to inform key questions surrounding the political economy of development.

Patterns of FDI in Latin America

The total value of annual FDI inflows into Latin American and Caribbean countries increased from less than $15 billion in 1990 to $135 billion in 2017, reaching a peak in 2011 approaching $200 billion (see Figure 1). In 2017, the total FDI stock in the region (the cumulative sum of direct investments held by foreigners net of outflows) stood at over two trillion U.S. dollars, representing more than a third of the region’s annual gross domestic product (GDP; UNCTAD 2018). Over the period from 2005 to 2017, 32% of inward flows originated in the United States or Canada, 39% from the European Union, and 9% from other Latin American and Caribbean countries (ECLAC, 2018). In general, U.S. capital plays a larger role in Mexico and Central America while EU investment is greater in South American countries (ECLAC, 2018). Despite increases in investment since the mid-2000s, Chinese FDI represents just 5% of the total direct investment flows over this period.

Foreign Direct Investment and Its Politics in Latin America

Figure 1. FDI Latin America and the Caribbean (millions of constant 2010 U.S. dollars).

Data Source: UNCTADstat (2018).

The vast majority of FDI goes to just a few recipients. From 2000 to 2017, Brazil averaged nearly $45 billion annually, Mexico saw $28 billion, and only six Latin American countries averaged more than $5 billion per year (Figure 2). However, for 14 of 19 major Latin American and Caribbean countries, average annual direct investment flows represented over 2% of GDP, and for six countries (Panama, Chile, Nicaragua, Honduras, Jamaica, and Costa Rica) FDI represented more than 5% of GDP (Figure 3). Taken together, it is clear that FDI is an important source of capital for Latin American countries and political scientists are justified in their efforts to understand the causes and consequences of these kinds of investments.

Foreign Direct Investment and Its Politics in Latin America

Figure 2. Average annual FDI 2000–2017 (millions of constant 2010 U.S. dollars).

Data Source: UNCTADstat (2018).

Foreign Direct Investment and Its Politics in Latin America

Figure 3. Average annual FDI as a percentage of GDP 2000–2017.

Data Source: UNCTADstat (2018).

Potential Determinants of FDI

The scholarship examining the determinants of FDI in Latin America has grown out of and been in constant dialogue with the analyses of patterns of international investment more broadly, especially into developing countries.1 Both literatures in political science further overlap with studies in economics, which often examine macro- and microeconomic conditions that attract FDI, and in business administration, which emphasizes firm-level investment decision-making processes. Particularly influential is the Ownership, Location, and Internalization (OLI) model which assumes that firm-level investments in other countries are based on an analysis of the benefits and costs associated with investing abroad in the first place and then deciding to locate in a particular host (Dunning, 1981, 1988). The following outlines the scholarship surrounding the key determining variables examined by political scientists analyzing FDI in Latin America.

Regime

Perhaps no variable has received more attention with regard to its possible effect on FDI than regime type. An influential debate emerged in the 2000s as to whether democracies or authoritarian regimes would attract more FDI (Blanton & Blanton, 2007; Büthe & Milner, 2008; Choi & Samy, 2008; Hecock & Jepsen, 2014; Jensen, 2003, 2006, 2008; Li & Resnick, 2003). Li and Resnick (2003) make the case that autocracies are likely to receive more investment for three reasons. First, large MNCs entering small markets may be able to practice monopolistic pricing behavior that harms local consumers, and autocratic regimes may lack the free flow of information and active press that could shed light on these actions. At the same time, unlike their democratic counterparts, autocrats themselves could more easily resist pressure from their people even if the damage to consumers were obvious. Second, to the extent that government leaders might use unpopular inducements to lure investors such as tax holidays or regulatory waivers or benefit themselves in the context of corrupt arrangements, autocrats are expected to be able to hide these practices from the public or quell emergent resistance through repression. Finally, even if foreign investment is broadly beneficial to a host’s development prospects, it is also likely to be perceived as a challenge to powerful local constituencies. National companies that sell products or services to the domestic market may be squeezed by the competition presented by foreign entrants, and authoritarian leaders may be better positioned than democrats to resist the opposition to investment from both firm owners and workers. Jensen (2006) further suggests that authoritarian regimes are attractive to investors because of their ability to depress wages, whether through policy or by repressing labor organizations. This argument is especially attractive given the perception that capital has fled to the developing world in the last decades in search of low-wage labor.

By and large, however, Jensen (2003, 2006, 2008) is more convinced that democracies rather than authoritarian regimes will see greater inflows of FDI. Far from a deterrent, investors value open societies with free-flowing information in order to be able to assess potential risks and opportunities with better accuracy. Furthermore, rather than opaque back-room deals with agents of an authoritarian government, investors are likely to prefer a standardized and legal system of private-public relations that ensures that competitors are also playing on a level field. Finally, in addition to a more general respect for the rule of law, democracies are likely to have more transparent and consistent regulatory contexts. The democratic policy-making process has checks and veto points, ensuring that any changes are deliberate and slow to emerge, allowing investors time to adjust. In contrast, authoritarian regimes can change the rules of the game quickly and arbitrarily in ways that negatively affect foreign investors, up to and including nationalizing their assets.

Though instructive, this broader debate about the relationship between regime and investment does not entirely fit the Latin American context in the decades following the debt crisis. Indeed, the rapid increase in FDI flows in the 1990s corresponded with a wave of democratization to the point that, at the peak of investment flows in 2011, almost all Latin American countries were considered democratic to one degree or another. This presents both theoretical and empirical opportunities. Rather than looking at regime as a simple dichotomous variable, Latin America offers the chance to engage in more nuanced examinations of the level of democracy. Several studies of the region have employed the Polity IV index (Marshall & Jaggers, 2018). Biglaiser and DeRouen (2006) do not detect an effect of this measure of democratic quality on a sample of Latin American countries from 1980 to 1996, however Montero (2008) finds there is a negative effect on investment flows for a slightly later period. Hecock and Jepsen (2014) find that the level of democracy as indicated by Polity IV does influence FDI flows, but that the effect varies by investment sector.

As of yet, however, scholars have not taken full advantage of the potential of examining different aspects of democracies versus autocracies. The number and type of legislative veto points, for example, vary not just across but also within regime types. If indeed slowly changing policy environments are favorable to investment, this should be visible across democratic institutional contexts in Latin America. Similarly, if democratic leaders are more likely to actively court FDI because of the economic benefits that accrue to citizens, this should be detectible across varying levels of electoral competition as leaders in more competitive arenas seek investment in order to be more responsive to voters. Taken together, these two questions alone allow scholars to address important issues of horizontal and vertical accountability in Latin American politics (Luna & Vergara, 2016).

Other variables facilitate the analysis of the effects of various aspects of the nature and quality of democracy on the likelihood of incoming FDI. The level of corruption is likely to affect investment flows, though the direction of the effect is not obvious. Like the argument that authoritarian regimes are more attractive, perhaps investors seek contexts in which they can get an illegal edge. Alternatively, consistent with the democracy argument, maybe clarity and transparency are preferred. Another set of possible determinants of FDI in the context of Latin American democracies concerns the nature of ruling parties and party systems more broadly. More institutionalized party systems composed of parties with ideologically identifiable platforms may be preferable to investors because of the policy predictability they represent. Likewise, such systems are less prone to the emergence of personalist or populist leaders whose ruling style may be more erratic or prone to backsliding toward authoritarianism. Overall, there is untapped potential in more nuanced analyses of the relationship between democracy and FDI in the developing world, and studies of Latin America in particular are poised to illuminate the broader debates.

Economic Liberalization

FDI has been touted as one of the main prizes accruing to countries that open themselves to the world economy. Accordingly, a number of studies have considered the ways in which FDI is likely to be affected by various liberal policies, including low trade barriers, financial liberalization, privatization, low corporate taxes, and decreased restrictions on the movement of capital (Ahlquist, 2006; Biglaiser & DeRouen, 2006; Büthe & Milner, 2008; Montero, 2008; Tuman & Emmert, 2004). In the context of increasing globalization, it is expected that investors would generally prefer more open economies, especially with regard to trade. Countries with low trade barriers are likely to have greater access to other markets due to reciprocity. Thus, investors seeking to manufacture products or extract resources for export are likely to privilege hosts with little trade protection. Additionally, a key feature of global economic integration is the increase in international supply chains for production. In this context, investors are liable to prefer free traders in order to have unencumbered access to inputs as well as an ability to export final products.

Likewise, financial liberalization may be attractive to investors to the extent that it might bolster the banking system and increase the availability and affordability of credit. Low corporate tax burdens are also likely to increase FDI as investors seek the lowest cost of doing business. The privatization processes will lead to an initial influx of capital as international investors are among the bidders on sales of previously state-owned or state-dominated companies. Privatization also signals that fewer domestic actors in the economy have unfair advantages that come with formal links to government officials. Finally, capital liberalization is likely to be of paramount importance to international investors as they seek to be able to move money into and out of their companies abroad unencumbered by duration requirements or repatriation restrictions. They may also be deterred by domestic content conditions.2

Examining Latin American countries in particular during the period of economic opening, Tuman and Emmert (2004) find that trade volume has a positive effect on FDI. Similarly, Biglaiser and DeRouen (2006) find that trade and financial liberalization exhibit positive effects on investment. However, they find no support for the expectation that the elimination of investment restrictions has an impact on FDI flows. In his study of Latin American countries from 1985 to 2003, Montero (2008) finds that rather than trade, it is a trade surplus that matters. Indeed, his models indicate that the current account balance overwhelms all other reform variables as a predictor of investment flows. He argues that measures of the current account are easily available to investors and surpluses indicate sufficient macroeconomic health that they can be confident of both political and economic stability.

Future studies of the effects of economic policies on FDI in Latin America should pursue indicators that permit a more nuanced view of the policy environment. For example, most researchers of FDI have employed trade flows as a percentage of GDP as a proxy for trade openness. In addition to being an indirect measure of actual liberalization, it is very likely endogenous to FDI in that it is probable that foreign investment has some impact on trade volume, as well as the reverse. Though more difficult to collect, data on tariffs or other trade barriers would be much more helpful in illuminating the actual effects of policy on investment. Büthe and Milner (2014), for example, examine the impact of trade agreements on FDI flows. As cross-country industrial policies diverge from the relative uniformity of the Washington Consensus, attention to policy details and case experiences should likewise be helpful.

Race to the Bottom

One of the acknowledged dangers of an increased reliance on foreign investment is that countries might engage in a destructive competition to increase FDI at the expense of living standards. Early waves of FDI in the 1990s and 2000s did seem to be fleeing expensive labor costs and environmental regulatory burdens in rich countries for the low wages and promiscuous environmental policies of the developing world. Indeed, some evidence of a race to the bottom to be most attractive to investors did seem to emerge. The maquila sector in Mexico offers some evidence to support this. In the wake of the signing of NAFTA in 1994, FDI poured into Mexico’s border areas to employ low-wage workers for low-skilled assembly production. There is ample anecdotal evidence that the relatively lax environmental regulations (by U.S. standards) were often ignored with apparent official sanction. Similarly, labor organizing was discouraged, and the sector infamously preferred hiring female employees who were perceived to be more compliant than their male counterparts and least likely to demand higher wages. After China joined the World Trade Organization, that country became a major destination for investors seeking similar attributes during the 2000s, and Mexico found itself at a competitive disadvantage. It simply could not match China’s low labor costs and malleable regulatory framework. As a result, FDI to the maquila sector in Mexico plummeted (though it has since rebounded).

Rudra (2008) was one of the first scholars to examine the effect of economic liberalization on a potential race to the bottom in public social programs. She grounds her study in the broad literature on the determinants of social spending and employs FDI as one indicator of the extent of a country’s liberal policy regime. She argues that developing countries that are more open are likely to have lower social spending for two reasons. First, as they attempt to attract FDI, leaders in developing countries are going to spend less on education and have fewer labor regulations in order to bend to perceived investor preferences for low-wage workers. Second, fearing investors will be generally wary of countries with large social programs because of their expectation that they correlate with meddling, high-tax governments, leaders will reduce spending in order to appear as lean as possible.

Hecock and Jepsen (2013) approach the race to the bottom from the perspective of the FDI literature in particular. Rather than ask what governments do in order to attract FDI, they investigate whether spending is indeed a determinant of FDI. Far from a need to race to the bottom, examining countries in the developing world from 1972 to 2008, they find that higher levels of health and education spending are associated with greater FDI inflows. Indeed, whether or not leaders believe they should engage in a race to the bottom, there is increasing evidence that investors would prefer more government spending, at least with regard to investment in human capital. Noorbakhsh, Paloni, and Youssef (2001) find that FDI flows to developing countries with higher secondary school enrollments. Likewise, examining Mexico in particular, Samford and Ortega Gomez (2014) find that states with greater mean years of schooling see higher levels of investment.

The argument is not hard to make: even investors seeking low-skilled, low-wage labor would, all things equal, prefer better educated, healthier workers because they are more productive than sicker, less-literate alternatives. Yet it is also increasingly the case that investors are looking for highly skilled low-wage labor forces. This was evident as money flowed into India in the 2000s to employ software engineers, service call-center representatives, and other information and technology professionals. Latin America has seen similar high-skilled labor demand among foreign investors in the automobile sector, pharmaceuticals, and a variety of services such as mobile phones and internet. Costa Rica became a magnet for high-tech firms in the 1990s when Intel built semiconductor manufacturing facilities in the country. The Mexican state of Querétaro has become a hub for the aerospace sector, attracting manufacturing investment from such giants as Bombardier, among others. Interviews conducted of representatives of MNCs in Mexico in 2016 pointed to the lack of available high-skilled labor as one of the largest impediments to even greater FDI flows to that country. Firms in both countries have begun to establish partnerships with local universities to increase the indigenous supply of engineers.

The prospect that countries might race to the bottom is rightly worrisome. If this is the strategy governments take to court investment, foreign investment is unlikely to bring with it the type of broad-based development prospects that have been presented as its chief benefit. In contrast, the fact that at least some FDI is seeking higher levels of human capital is heartening. Likewise, that some investors appear to be attempting to cultivate high-skilled workforces within their hosts indicates that FDI as a development tool retains some of its promise. Scholars should thus engage in more fine-grained analysis to better understand the kind of public investments that best complement particular development goals.

Other Factors

Scholars have examined a wide range of other factors as potential determinants of FDI in Latin America and the developing world. A number of studies have tested the effects of human rights records on FDI. Consistent with the logic that predicts an affinity with authoritarianism, one argument suggests that FDI will flow to countries with governments that can repress workers, hide improprieties, and easily quell any type of resistance to the presence and actions of foreign investors.3 Indeed, looking at Latin American countries from 1979 to 1996, Tuman and Emmert (2004) find evidence of a positive effect of human rights violations on FDI.

In contrast, Blanton and Blanton (2007) make the case that while there is evidence of an affinity for abusive regimes among at least some foreign investors in the past, countries that respect the rule of law became more likely to see FDI in the decades after the end of the Cold War. They argue that this shift is partly a result of changes in the audience costs borne by MNCs whose executives are increasingly conscious of the drawbacks of being associated with repressive regimes and their tactics. Additionally, to the extent that the allure of abusers was because of a desire to weaken organized labor, the calculation changed as labor costs became a smaller and smaller share of overall production expenses, in part due to automation. Finally, as foreign investment in manufacturing began to grow relative to FDI in commodities, there has been a greater need for a more productive workforce, one that can be better developed in the context of an open society that values freedom and education. In an analysis of a large pool of developing countries from 1980 to 2003, they find support for the contention that fewer human rights violations lead to more investment (Blanton & Blanton, 2007), and in a later study (2009) they explore how these effects vary by sector. Garriga (2016) shows that countries with worse human rights records are somewhat protected from a bad reputation by joining international human rights regimes. Future studies examining Latin America in particular should consider the changing nature of the relationship between FDI and human rights in the context of democratization and globalization.

Political ideology may also have a substantial effect on foreign investment. One straightforward argument is that countries controlled by parties on the right of the ideological spectrum will see greater levels of FDI because they are more likely to adopt business-friendly policies including low corporate taxes and fewer labor protections. Pinto (2013), however, argues that leaders on the right are likely to favor domestic business interests even to the point of thwarting foreign investors through capital restrictions and trade barriers that protect local firms from international competition. By contrast, he argues that leaders on the left will court FDI because inflows of foreign capital will increase the demand for labor, their principal constituency. Pinto finds support for his argument in a statistical analysis of a large sample of countries alongside case studies of South Korea and Argentina. In a challenge, Owen (2015) finds that labor union density is associated with greater investment restrictions in rich countries. More detailed studies of FDI in Latin America could serve to reconcile these differences and to further understand the relationship between ideology and investment in the developing world.

Given the unfortunate realities in some parts of Latin America, the effects of corruption and crime on FDI deserve serious attention. With a few exceptions, however, very little scholarship has emerged to help us understand these patterns. Gómez Soler (2012) finds no evidence that organized crime affects FDI flows throughout the region. However, examining the Mexican case, Ashby and Ramos (2013) find that crime affects FDI in some sectors but not others. Corruption is hypothesized to provide either a beneficial “helping hand” to foreign investors or a costly “grabbing hand” consistent with a lack of rule of law (see e.g., Egger & Winner, 2005). However, the few studies that focus on the phenomenon are mostly in the business literature and taken together are inconclusive. No doubt part of the reason for the dearth of scholarship on the issue concerns the difficulty of analyzing concealed, illegal activities. Yet given its pervasiveness in parts of the region, this is an important subject with implications for both political and economic development.

The Political Effects of FDI

The literature on the effects of foreign investment in the developing world in general and Latin America in particular has its origins in the dependency theories of the 20th century. Early dependency theorists emphasize the detrimental effects on poor countries of MNCs that exploit local labor and extract natural resources, inhibiting domestic development. Later analyses of dependency and development point to a more nuanced role for foreign investors. Cardoso and Faletto (1979), for example, identify the problems associated with “enclave” economies in Latin American countries where commodity sectors dominated by foreign investors repatriate profits, provide few linkages to the host economy, and negatively impact domestic social and political structures. Evans (1979) shows how MNCs interacted with domestic investors and the Brazilian state to have both negative and positive effects on development. The significant insights of these and later works deserve continued consideration by scholars trying to understand the impacts of foreign investment in the 21st century.

Attention to the effects of FDI in the neoliberal era has been far less comprehensive. A small but important body of scholarship has emerged, and though much of it is focused across regions, these studies show great potential for helping to understand contemporary Latin America. For example, Blanton and Apodaca (2007) find evidence that the intensity of civil conflict decreases with greater flows of FDI. Using the case of Vietnam, Malesky (2008) explores how FDI in a particular region can empower local elites vis-à-vis national authorities. Mosley and Uno (2007) find that FDI has a positive effect on workers’ rights.4 Pinto and Zhu (2016) find that FDI has a positive effect on corruption in developing countries because of the increase and concentration of available rents. In wealthy countries, FDI has a negative effect on corruption because competition with a greater number of domestic firms reduces the resources available to support graft. Looking at Mexico in particular, Jensen and Rosas (2007) find that flows of direct investment had a negative effect on inequality in a subnational analysis of states during the 1990s.

These and other areas of research surrounding the effects of FDI deserve a great deal more attention than they have received. Indeed, the stimulus of the rich body of scholarship on the causes of FDI flows is the assumption that foreign investment is one of the key benefits of economic opening. If, as Pinto and Zhu find, it contributes to greater levels of corruption (and at the very least it is clear that corruption has not diminished in Latin America in the context of liberal economic policies), this should lead us to examine approaches to luring and managing investment that might mitigate such costs. At the center of scholarship on the political economy of Latin America over the last few decades has been the interaction between economic reform and democratization. Studies of FDI as a causal variable provide the opportunity to understand some of the key effects of globalization on the politics of the region. For example, one danger to democracy posed by neoliberalism is that global markets put such constraints on policymakers as they pursue global capital that distinctions among parties disappear (Weyland, 2004). This could lead to a disintegration of party systems and facilitate the emergence of antidemocratic populists. What is the effect of FDI on party system institutionalization? How does foreign investment affect electoral competition? How does it affect the vibrancy of civil society? In answering these and other questions, research on FDI could play a much larger role in some of the debates at the heart of the study of Latin American politics.

Methodological Challenges and Opportunities

Data Quality and Operationalization

Among the difficulties of examining the causes or consequences of FDI is the reliability of the data. Many of the studies cited here trace FDI flows across countries and time starting decades ago. Scholars should be explicit about the possible limitations that exist due to inconsistent collection and reporting of foreign investment figures over long periods of time and across vastly different contexts. Even as data collection becomes more systematic, there is reason to be wary about government-reported values of FDI. As some leaders declare large inflows as evidence of their macroeconomic policymaking success, there is an incentive to pad the numbers. Conclusions drawn from these data should be placed in this context. One solution to this potential pitfall is to use data on FDI from one developed country. Tuman and Emmert (2004) rely on U.S. government figures of FDI from the United States to Latin American countries. In addition to being more reliable and consistent, they contend that it controls for widely varying corporate cultures across FDI-sending countries that may account for systematic differences in investor preferences for human rights, for example.

Related to questions surrounding the quality of the data is the operationalization of investment figures. Most studies have standardized FDI as a percentage of GDP. Li (2009) rightly argues that this measures the extent to which a country’s economy is dependent on FDI, so scholars should be wary of interpreting independent variables as determinants of FDI flows. Instead, he contends that analyzing FDI flows (logged to account for skewness) produces results that are more readily interpreted as the causes of investment. A solution is to simply report results from models with both measurements of FDI. However, this merely highlights the fact that FDI/GDP is not the same as FDI flows, and results for each are highly likely to differ. Scholars should be deliberate in their choice of dependent variable and carefully consider how they can interpret the results.

Finally, scholars might consider shifting the unit of analysis from countries to subnational units within federal states. One advantage of limiting the analysis of the causes of FDI to a particular region like Latin America is that it is easier to control for a number of cultural, historical, and geographic characteristics that are relatively homogeneous across countries. This is even more so the case within a single country. An added benefit may be the consistency of the collection of FDI data by one central government. Such an approach does present some limitations. For example, the variation in policy toward foreign investment (e.g., trade and capital controls) are not likely to vary across subnational units. Additionally, it may be difficult to examine aspects of regime within a country that is broadly democratic (or authoritarian). At the same time, subnational analysis within a democracy provides the opportunity to examine the effects on investment of varying levels of electoral competition and across broadly similar institutional environments. Likewise, there may be real value in exploring the effects of ideological differences across states or provinces with similar partisan contexts. There have been some analyses of the determinants of FDI to U.S. states (Hanna, 2010; Hines, 1996), and there is recent work on subnational FDI in Mexico (Samford & Ortega Gomez, 2014). More work on such large federal systems as Brazil and Argentina may prove fruitful.

Disaggregation

The vast majority of the work on the determinants of investment have examined FDI in aggregate. While there are theoretical reasons to think of direct investment as a single category, the level of attention paid to it is also a function of data availability. Yet there is every reason to believe that different types of investment are attracted to wildly varying aspects of a potential host and that these differences have meaningful implications for the political economy of development. At the most basic level, “efficiency-seeking” investment flows to Latin American countries to take advantage of lower production costs, particularly with regard to labor. In contrast, “market-seeking” FDI aims to provide goods or services to domestic consumers while “resource-seeking” investment pursues commodities (Blanton & Blanton, 2009; Dunning, 1988). It is worth considering the potential determinants of each kind of investment and evaluating their effects empirically, and some studies have begun to do just that (Blanton & Blanton, 2009, 2012; Hecock & Jepsen, 2014; Samford & Ortega Gomez, 2014).5

Samford and Ortega Gomez (2014), for example, examine patterns of investment across Mexican states. Using investment in manufacturing as a proxy for “efficiency seeking” and into the service sector as representative of “market-seeking,” they find substantial variation in the causes of FDI flows across categories. In particular, they only find support within the service sector that investment privileges higher levels of educational attainment. Likewise, there is evidence that investors in resources seek areas of the country with lower levels of crime and corruption. Hecock and Jepsen (2014) examine FDI by sector across Latin American countries over the period 1986–2006 and find that determinants differ considerably. Speaking directly to the debate on the effects of regime, they find evidence that resource-sector investors seek higher levels of democratic governance and respect for the rule of law. They argue that, because natural resources are often the target of nationalization campaigns, these investors are especially concerned with the possibility of arbitrary rule changes and lack of property protections associated with authoritarianism. By contrast, FDI in the manufacturing sector appears to flow to less democratic countries. Investment in this sector also appears to be uniquely volatile, behaving somewhat similar to portfolio investment and thus undermining some of the expected benefits of FDI.

At the least, these studies demonstrate the utility of looking below the level of aggregate FDI to understand the behavior of investment. Yet even within these subcategories and across specific industries, there is likely to be variation. Natural resource investors likely have different preferences depending on whether they are pursuing oil, minerals, or agricultural products, for example. The service sector includes such disparate activities as retail sales, investment and banking, tourism, and construction. Similarly, FDI in the manufacturing sector is very likely to behave differently depending on the sophistication of production and the capital-intensiveness of facilities. FDI in the high-tech sectors that have emerged in Mexico and Costa Rica, for example, requires a large pool of technically trained workers and a government that protects substantial outlays in physical capital and responds to firms’ infrastructure needs. In contrast, many assembly plants in the maquila sector along the U.S. border require workers with only basic education and occupy inexpensive warehouse facilities that can be abandoned easily as market conditions shift.

In a study of the effects of human rights records on U.S.-originating FDI to a sample of developing countries, Blanton and Blanton (2009) examine subsectors of the three categories of FDI discussed earlier. These subsectors reflect further variation along two dimensions: worker skill requirements and the extent to which firms are likely to be integrated into a host society. In general, they find evidence that sectors requiring high-skilled labor and tending toward greater host integration are more likely to be attracted to countries with a better record on human rights. Not only do these studies show the scholarly value of disaggregating FDI, but findings such as these by Blanton and Blanton (2009) suggest the need for policymakers in developing countries to be discriminating in their attempts to lure foreign investment. Sectors with FDI that is attracted to higher levels of human capital, better governance, and human rights will likely see investors that are committed to positive futures for their hosts. Armed with a more nuanced understanding of investment behavior, leaders can concentrate on attracting the types of FDI that best match their development goals. Despite the difficulty of attaining reliable disaggregated data, these valuable implications should prompt researchers to be creative in seeking ways to examine the determinants of different kinds of FDI.

Qualitative Research

Finally, the great bulk of the literature on the politics of FDI in Latin America and the developing world has relied exclusively on quantitative data. This makes a certain amount of sense given the nature of the variable of interest. Yet scholars have effectively been attempting to tease investor preferences from these numbers. It seems worthwhile to simply ask investors what those preferences are. This is especially true because of the problems of data reliability mentioned previously. Jensen et al. (2012) take a large step toward understanding investor motivations by surveying CEOs of U.S. MNCs with direct investments in Latin America regarding their views on democratic political institutions. Likewise, Biglaiser and Staats (2010) survey executives of U.S. MNCs and find that, rather than democracy per se, investors are concerned with the rule of law and the quality and capacity of judicial institutions as they choose among hosts. In-depth interviews could further enrich this type of survey data. Interviews conducted with representatives of MNCs in Mexico City in 2016 suggest that such qualitative methods can yield important insights that can complement quantitative modeling. For example, representatives of foreign firms engaging in sophisticated manufacturing explained that the single biggest limitation to greater investment in the country by their companies was the lack of indigenous engineers and technically trained workers. For them, questions about the quality of governance or political ideology were far down their list of concerns. Not only will qualitative research methods enrich our understanding of the preferences of investors in general but they will also facilitate the type of disaggregated analysis that is limited by the availability of FDI figures.

Concluding Thoughts

As market-oriented economic policies were recommended to countries throughout Latin America in the 1980s, FDI was expected to be a particular prize. Direct investment brings employment, technology, and stimulates linkages, among other benefits. Furthermore, FDI is less volatile than portfolio investment, and firms locating facilities inside other countries are expected to be vested in the political and economic futures of their hosts. Partly as a result of these substantial benefits, a body of scholarship emerged to try to understand the characteristics that were most likely to attract FDI. Scholars have attempted to understand the effects of regime, ideology, policy, human capital, and political risk, among other key variables. Notwithstanding the important contributions of this literature to our understanding of investment behavior, there is untapped potential deserving of future study. However, realizing this potential requires uncovering nuance in the relationship between FDI and political context that has largely been lacking in the scholarship up to this point. Particular promise lies in analyses of FDI destined for different sectors and industries. Methodologically, studies of FDI figures should be complemented with survey instruments and qualitative data. FDI research lies at the heart of questions surrounding the dynamics of democracy, development, and economic policy regimes. Detailed studies of foreign investment in the Latin American context remain poised to make substantial contributions to development studies, political economy, and comparative politics.

Further Reading

Biglaiser, G., & DeRouen, K. (2006). Economic reforms and inflows of foreign direct investment in Latin America. Latin American Research Review, 41(1), 51–75.Find this resource:

    Büthe, T., & Milner, H. V. (2008). The politics of foreign direct investment into developing countries: Increasing FDI through trade agreements. American Journal of Political Science, 52(4), 741–62.Find this resource:

      Dunning, J. H. (1981). International production and the multinational enterprise. London, U.K.: Allan and Unwin.Find this resource:

        Jensen, N. M. (2006). Nation states and the multinational corporation: A political economy of foreign direct investment. Princeton, NJ: Princeton University Press.Find this resource:

          Jensen, N. M., Biglaiser, G., Li, Q., Malesky, E., Pinto, P. M., & Staats, J. L. (2012). Politics and foreign direct investment. Ann Arbor: University of Michigan Press.Find this resource:

            Li, Q., & Resnick, A. (2003). Reversal of fortunes: Democratic institutions and foreign direct investment inflows to developing countries. International Organization, 57(1), 175–211.Find this resource:

              Mosley, L. (2011). Labor rights and multinational production. Cambridge, U.K.: Cambridge University Press.Find this resource:

                Pinto, P. M. (2013). Partisan investment in the global economy: Why the left loves foreign direct investment and FDI loves the left. Cambridge, U.K.: Cambridge University Press.Find this resource:

                  Tuman, J. P., & Emmert, C. F. (2004). The political economy of U.S. foreign direct investment in Latin America: A reappraisal. Latin American Research Review, 39(3), 9–28.Find this resource:

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                                                                                                                Notes:

                                                                                                                (1.) See in particular Jensen et al. (2012) for an overview and analyses of FDI in the developing world.

                                                                                                                (2.) See Biglaiser and DeRouen (2006) for a thorough discussion of the expected effects on FDI of different aspects of economic liberalization.

                                                                                                                (3.) See Blanton and Blanton (2007) for a thorough discussion of the competing hypotheses.

                                                                                                                (4.) See also Mosley (2011) for an extensive treatment of the relationship between FDI and labor.

                                                                                                                (5.) See also Chapter 4 of Jensen et al. (2012) for an examination of how FDI from different sectors affects the incentives of political leaders.