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Campaigning for Capital: Fair Elections and Foreign Investment in Comparative Perspective

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  • Michael Touchton

Abstract

This article makes several contributions to the literature on political risk and the determinants of capital inflows. First, I clarify the relationship between capital flows and democracy’s constituent parts in a way that takes arguments beyond aggregate democracy indicators and static political institutional structures. Specifically, I argue that fair elections signal government respect for democracy and the rule of law in a highly visible manner investors can access. I show how investors therefore use the fairness of elections as a way to assess political risk and to inform their investment strategies. However, the type of investment and the kinds of evidence of electoral misbehavior condition elections’ influence on capital flows. I also disaggregate capital flows into foreign direct investment (FDI) and portfolio investment. I argue that the logic of investing is different in the short term (portfolio) versus the long term (FDI). When it comes to political risk, I provide evidence that portfolio investment is much more sensitive to risk factors than FDI because of the relative ease with which portfolio investors can extricate themselves from an increasingly risky market and seek safer returns elsewhere compared to direct investors.

Suggested Citation

  • Michael Touchton, 2016. "Campaigning for Capital: Fair Elections and Foreign Investment in Comparative Perspective," International Interactions, Taylor & Francis Journals, vol. 42(2), pages 271-294, March.
    • Handle: RePEc:taf:ginixx:v:42:y:2016:i:2:p:271-294
    DOI: 10.1080/03050629.2016.1093475
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    1. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, March.
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    Cited by:

    1. Wong, Pui-Hang, 2017. "How development aid explains (or not) the rise and fall of insurgent attacks in Iraq," MERIT Working Papers 2017-006, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    2. Anselm Komla Abotsi, 2018. "Tolerable Level of Corruption for Foreign Direct Investment in Europe and Asia," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 12(3), September.

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