As countries transitioned to democracy, particularly in Eastern Europe, they did so with the hope of attracting foreign direct investment (FDI). In tandem, many scholars theorised on, and demonstrated empirically, the links between democracy and investment. And yet, just as many of those same countries have backslid on their democratic commitments, investment in those countries has only increased. Hungary and Poland, for example, have received surprisingly high levels of FDI regardless. This reality poses a challenge to our understanding of the relationship between democracy and investment: Why does investment continue to flow into backsliding countries?
Julia Gray and her co-authors, Dan Kelemen (Rutgers University) and Terence Teo (Seton Hall University), argue that the literature on democracy and investment overlooks the differing incentive structures facing governments and firms across sectors of production. They posit that only some sectors – primarily politically sensitive ones, such as communication, and those that are easily captured and require little expertise, such as hospitality – will be sensitive to the political risk caused by backsliding. In contrast, high-value sectors, such as manufacturing, can actually benefit from the ‘authoritarian equilibrium’ in which backsliding governments can assure firms of private protection. They test this argument using sectoral data of investment in Eastern Europe, accounting for rival explanations, such as the idea that investment into backsliders only comes from autocratic countries. Case evidence from Hungary – which continues to receive high levels of investment from Germany and South Korea, among others – illustrates their causal mechanism.
Registration deadline: 9 December 2020 @ 17.00 CET
Chair: Robin Markwica (EUI)
Speaker: Julia Gray (EUI)
Organisers: