Why do foreign investors invest in personalist dictatorships?
In “Monopoly Rents and Foreign Direct Investment in Fixed Assets” published in International Studies Quarterly Wright and Zhu point to the surprising observation — multinational companies tend to invest a lot in oil and mining sectors in countries as Sadan, Guinea, Tanzania or Mali. These countries are not famous for good governance and the basic economics says that investors would be afraid of making big investments in such countries fearing corruption.
However, Wright and Zhu claim that investors invest exactly because of corruption. Dictatorships, especially personalist regimes, do not worry about free market and redistribution and can tolerate monopolisation of the market. Therefore, when a multinational company builds an oil rig in the personalist dictatorship it can expect no competition in exchange for bribes or favours to the dictator. Interestingly, foreign investors shouldn’t have such opportunities in democracies or party dictatorships where the rents have to be distributed among different interest groups and therefore can’t be monopolised.
Wright and Zhu analyse the data on foreign direct investments and show that personalist dictatorships indeed receive more investments in the resource sector. The positive effect of dictatorship is bigger than the negative effect from the risk of war or expropriation. Moreover, this dynamic exists only in resource sector which can be easily monopolised. For goods such as textiles dictatorship can’t offer the guarantee of monopolisation.
Wright and Zhu support the proposed mechanism by showing that personalist dictatorships also correlate with bad governance, higher rates of corruption among resource companies and higher export concentration. These findings support the idea that foreign investors obtain a concentrated market for bribes to the ruling family.
https://academic.oup.com/isq/article-abstract/62/2/341/5049186?redirectedFrom=fulltext