Quality of foreign direct investment inflows in post-socialist transition economies
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This PhD thesis develops and tests a model of bargaining between foreign investors and domestic institutions in transition countries. For this purpose this research employs a mixed-methods research methodology combining three studies - two macro-level quantitative and one micro-level qualitative - examining various aspects of the relationships between institutional factors and the quality of inward foreign direct investment (iFDI) flows in transition economies (that is, the impact of iFDI on the host country institutional environment). Specifically, emphasizing the circular nature of the relationship between the applied variables, it attempts, firstly, to identify the impact of the institutional environment in post-Soviet and Central and Eastern European countries on the quality of FDI inflows, and, secondly, to determine whether and how this iFDI affects the quality of the host countries’ institutions. The analysis of the presence, size, and direction of the impact of iFDI is pursued through the study of foreign investors’ (FIs) nonmarket strategies with a special focus on political behavior. Despite the growing role of iFDI and of companies with FDI (especially MNEs) as one of the most important rent-seeking interest groups in many economies, the analysis of the impact of iFDI stocks and flows on the host country’s institutional environment has received much less attention than analysis of the impact of host country institutions on iFDI and has, moreover, produced mostly mixed results. This project is intended to fill this gap and to contribute to theory building on the relationships between iFDI quality, foreign investors’ political behavior, various aspects of institutional environment (including institutional voids), and institutional changes in host countries. It finds evidence for the hypothesis that certain combinations of patterns of quality of iFDI and host-country institutional variables determine foreign investors’ (FIs) political influence and political behavior and may also allow them to pursue their economic goals through manipulation of political regimes and, consequently, reshaping of the host country’s institutions in accordance with their strategic goals. The proposed model was tested quantitatively for a sample of 27 post-Socialist countries and qualitatively for the case of Ukraine. The results of all three studies provide evidence in support of this model. In particular, both quantitative panel studies provide evidence for the existence of ‘blind bargaining’ - a model depicting the cognitive situation of a foreign investor who lacks clarity on the situation he/she is in and, as a result is bound to act in conditions of extreme uncertainty due to the high degree of non-transparancy and instability of the “rules of the game” at any given moment and of their propensity for unpredictable change at any time in the future. ‘Blind bargaining’ originates from the specific state and society relationship that can be formed in neo-patrimonial host states where economic decisions are often not directed towards serving national interests, but towards supporting the personal aims of the officials in power. The first quantitative study shows and explains the attractiveness of such countries to riskier investors, who prefer relatively weak political regimes over stronger ones and who reduce their investment inputs once host states become more assertive. This model of relationships leads to the inflow of mostly ‘malign’ FDI (that is, iFDI that has a destabilizing impact on institutional competencies of recipient countries) into these economies. The second quantitative study examines the quality of iFDI flows in 12 post-Soviet states by determining the impact of attracted iFDI on local institutions, as measured by country risk indicators via a pooled regression model. The latter analysis shows that iFDI has a marginally negative effect on some individual country risk measures and a significantly negative effect on others, implying that there is a strong case for questioning the existing orthodoxy according to which the problems of transition can be overcome via increased iFDI. Given the complexity and context-specificity of foreign investors’ political behavior and its impact on host countries’ institutional capacities, this research acknowledges the need for a more targeted analysis at lower levels of aggregation. The thesis addresses this through a qualitative analysis of the relationships between foreign investors and host states in the context of one country - Ukraine. Interviews with company representatives and various experts were conducted to explore how changes in foreign investors’ bargaining power and, as a result, in their strategic choices regarding their political involvement impact the institutional environment in Ukraine. Based on the combination of empirical and theoretical insights described above, a ‘blind bargaining’ model was developed as a special case of the political bargaining model. It provides a comprehensive framework for explaining foreign investor – host state bargaining relationships in neopatrimonial transition economies and reveals several distinctive characteristics of both parties’ behavior in terms of their goals, resources, constraints, the nature of the bargaining process, strategies and outcomes. However, it is suggested that further country-specific tests are necessary to test its applicability beyond the transition countries, particularly in emerging and developing countries.