Democracy, Autocracy, and Expropriation of Foreign Direct Investment

Abstract

Stylized evidence indicates that democracies and autocracies both expropriate foreign direct investment but that democracies do so less frequently. What explains the similarities and differences in expropriation between regime types? An analysis of actual expropriation acts in 63 developing countries from 1960 to 1990 shows that democracies are most likely to expropriate foreign investment when leaders face little political constraint and when they reside in countries with frequent leadership turnover. Autocrats are least likely to expropriate foreign assets when they face high political constraints and have stayed in power for a long time. In essence, the chief executive's political incentive and policy-making capacity determine the host government's expropriation decisions. The findings have important implications for the rule of law, property rights protection, investment behaviors, and the prospect of privatization reforms.