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Political turnover, regime type, and investment behavior

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  • Bryan Rooney
  • Matthew DiLorenzo

Abstract

Firms and individuals condition their investment choices on domestic political factors in host countries. Existing research describes how government preferences and policy choices influence investment behavior. Some have argued that investors take a cautious approach in response to possible government turnover. We argue that the results of domestic political competition also matter. Domestic turnover creates uncertainty about the future direction of policy in a variety of areas relevant to investment decisions – e.g., changes in privileged relationships between the state and certain domestic producers or industries, trade barriers, and tax policies. Investors and firms should therefore hesitate to invest following domestic turnover in potential host countries. However, various institutional features of democracies should mitigate the extent to which domestic turnover causes uncertainty and deters investment. Our statistical analysis suggests that while non-democracies see less foreign direct investment in the wake of a change in the source of leader support, investment to democracies does not change significantly following domestic turnover. The note enhances our understanding of the determinants of investment and provides further evidence that democratic institutions matter for conditioning the effects of domestic turnover in a new empirical domain.

Suggested Citation

  • Bryan Rooney & Matthew DiLorenzo, 2021. "Political turnover, regime type, and investment behavior," International Interactions, Taylor & Francis Journals, vol. 47(4), pages 777-793, July.
  • Handle: RePEc:taf:ginixx:v:47:y:2021:i:4:p:777-793
    DOI: 10.1080/03050629.2021.1898960
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    Cited by:

    1. Dorottya Sallai & Gerhard Schnyder & Daniel Kinderman & Andreas Nölke, 2024. "The antecedents of MNC political risk and uncertainty under right-wing populist governments," Journal of International Business Policy, Palgrave Macmillan, vol. 7(1), pages 41-63, March.
    2. Sallai, Dorottya & Schnyder, Gerhard & Kinderman, Daniel & Nölke, Andreas, 2023. "The antecedents of MNC political risk and uncertainty under right-wing populist governments," LSE Research Online Documents on Economics 118668, London School of Economics and Political Science, LSE Library.

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