Comparative Political Studies Volume 42 Number 8 © 2009 ...people.tamu.edu/~quanli/papers/CPS-2009-expropriation.pdf · a news conference in La Paz on December 20, 2005, 2 days after

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Democracy, Autocracy, and Expropriation of Foreign Direct InvestmentQuan LiTexas A&M University, College Station

Stylized evidence indicates that democracies and autocracies both expropri-ate 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 govern-ment’s expropriation decisions. The findings have important implications for the rule of law, property rights protection, investment behaviors, and the prospect of privatization reforms.

Keywords: expropriation; foreign direct investment; multinational corporations; regime type; democracy; autocracy; event count model

International production has been increasing in volume and expanding in scope. It is widely viewed as one of the most salient aspects of globaliza-

tion. Many developing countries are seeking to attract foreign direct invest-ment (FDI), hoping to benefit from capital inflow, technology transfer,

Author’s Note: The author thanks the journal’s editor, three reviewers, Michael Bernhard, Jerry Cohen, Jim Eisenstein, Erik Gartzke, Witold Henisz, Nate Jensen, Jonathan Krieckhaus, Francine Lamoriello, Pablo Pinto, Stephanie Rickard, Ken Scheve, Mike Tomz, Matthew Winters, seminar/panel participants at Columbia University, Penn State University, the 2005 ISA meeting, the 2005 conference on The Political Economy of Multinational Corporations and Foreign Direct Investment at Washington University, the 2005 APSA meeting, and the 2006 IPES meeting for helpful comments and suggestions. Steve Kobrin and Michael Minor graciously made available the expropriation data. Daehee Bak, Young Hun Kim, Andreea Mihalache, and Tatiana Vashchilko provided research assistance.

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Li / Expropriation of Foreign Direct Investment 1099

managerial know-how, market access, productivity spillover, and economic growth. In this context, one popular claim is that the expropriation of foreign investment has lost relevance in the contemporary global economy. Indeed, expropriations peaked around the mid-1970s and then sharply declined.

A spate of recent expropriations, however, has renewed interest in the problem. For example, in 2005 the Namibian government issued expropria-tion orders to 18 White commercial farmers. In April 2006, Venezuela president Hugo Chavez seized two oil fields from two foreign oil firms: France’s Total and Italy’s Eni. On May 1, 2006, Bolivian president Evo Morales decreed the nationalization of the country’s natural gas industry. At a news conference in La Paz on December 20, 2005, 2 days after winning the presidential election, Morales announced,

Many of these contracts signed by various governments are illegal and unconstitutional. It is not possible that our natural resources continue to be looted, exploited illegally, and as the lawyers say, these contracts are legally void and must be adjusted. (Associated Press, December 21, 2005)

As these recent events demonstrate, FDI remains vulnerable and exposed to the risk of expropriation. In fact, as a business risk, expropriation has never ceased to impose economic costs, because foreign investors have always had to insure against and pay premium for such risk. The spread of international production around the globe may create opportunities for host expropriations of multinational corporation (MNC) assets. Because host countries have the authority to expropriate, their domestic politics have an obvious impact on its use.

In spite of the highly political nature of the phenomenon, extant explana-tions of expropriation in international business and political science have largely ignored the role of domestic political institutions. This research is the first to directly investigate how domestic political institutions influence actual expropriations against foreign multinationals. Specifically, it examines how political regime type affects actual expropriations of FDI. Evidence shows that democracies and autocracies both expropriate foreign investment but that democracies do so less frequently. To understand why, I examined chief executives’ political incentives and policy-making capacities across different regime types. The frequency of past chief executive turnover and the length of the incumbent’s tenure influence the leader’s time horizon and perceived political security, but these effects vary by regime type. Executive turnover increases expropriations in democracies but not in autocracies. Long tenure by leaders reduces expropriations in autocracies but not in democracies. Furthermore, leaders’ expropriatory capacities depend on their political

1100 Comparative Political Studies

constraints. Regardless of regime type, checks and balances reduce expro-priations, but democratic leaders generally face higher levels of constraints. These theoretical expectations received strong empirical support in an analysis of 63 developing countries from 1960 to 1990.

The rest of the article proceeds as follows. In the next section, I briefly review the relevant literature in international business and political science and present stylized evidence to motivate the research. I then discuss the theoretical argument and testable hypotheses; afterward, I describe the research design for the empirical analysis and present the findings and various robustness tests. I conclude the article by exploring the theoretical and policy implications of the findings.

Literature Review and Stylized Evidence

Despite the highly political nature of FDI expropriation, none of the busi-ness studies have examined the impact of domestic political institutions, nor have they tested, in one statistical model, various other arguments for a period of three decades. But international business scholars have studied how a vari-ety of other factors influence host expropriations, such as enterprise- and industry-specific factors, government capabilities and time horizon, national economic conditions, and temporal characteristics. For example, Truitt (1970) shows that from 1945 to 1970, American and British firms both suf-fered more expropriations in the oil-extractive sector than in manufacturing, public utilities, and services. Knudsen (1974) argues that the difference in the level of aspirations and the level of welfare and expectations increased the propensity of host government expropriations in Latin American countries from 1968 to 1971. Jodice (1980) finds that in a sample of 50 developing countries from 1968 to 1976, gross domestic product (GDP) per capita, state capacity, and civil war influence host expropriations of foreign-owned extrac-tive firms but that collective protests and U.S. foreign aid do not. Kobrin (1980) argues that enterprise-specific factors—such as involvement in infra-structure activities, the sector of investment, the level of technology, and the percentage owned by the parent company—affect the firm’s expropriation risk. Kobrin (1984) attributes the steep decline of expropriations after 1976 to four causes: the completion of expropriations in the extractive sector by the mid-1970s, the growing confidence of newly independent less developed countries over time, the improved regulatory capabilities of governments, and the deteriorating balance of payment conditions in many less developed countries. Minor (1994) confirms the declining trend of expropriations, uncovering still fewer expropriation cases from 1980 to 1992.


Like international business scholars, political scientists who have researched expropriations do not look at domestic political institutions for explanation. For example, Moran (1973) suggests that the MNCs in the primary sector often cope with host expropriation by manipulating the firm value chain (production, refining and processing, fabrication, marketing and distribution) or by raising capital for their ventures from the host government, customers, and international financial institutions to create a transnational alliance of stakeholders to discourage expropriations. Lipson (1985) indicates that after 1960, expropriations were often less motivated by “sharp nationalist rhetoric or invectives against foreign exploitation” or the desire for radical social change, but more so by the desire for “a state-led push toward industrialization, combining national planning, state-owned enterprises, local capital, and foreign investment.” Frieden (1994) argues that relative to those in manufacturing and public utilities, foreign investments in raw materials and agriculture are not only more easily appropriated and protected with force by the host government but also more likely to thwart collective action among investors. Although these earlier political economy analyses of expropriation produce insights that are consistent with those in the business studies, they do not consider the role of domestic political institutions.

More recently, political economists of FDI (e.g., Li, 2006; Li & Resnick, 2003; Jensen, 2003, 2005, 2006) apply the logic of Olson (1993, 2000) and North and Weingast (1989) on political institutions and property rights protection to explain the effect of democracy on FDI flows. They argue that greater checks and balances in democracies prevent the state from preda-tory rent seeking, thereby making its commitment to private property cred-ible, reducing expropriation risks for investors, and attracting more FDI to democratic countries. Although these studies center on the role of domestic political institutions, their focus is on the level of FDI, not expropriation. As a result, they do not offer a complete theoretical story on how domestic political institutions influence FDI expropriation. For example, their argu-ment does not take into account the incentives of politicians, nor does it explain why appropriative democracy or self-restrained autocracy exists in host–MNC interactions.

Empirically, these studies suffer from several methodological problems. They employ aggregate indicators of democracy, failing to tease out the poten-tially disparate effects of various aspects of the domestic political process. Furthermore, in their secondary analysis of the effect of democracy on prop-erty rights, they rely on subjective indicators, such as investor-perceived prop-erty rights protection and the political risk insurance premium. In studying expropriation, these indicators have measurement error that results from


incorrect subjective predictions and the lumping of different types of risks. In contrast, this study uses actual expropriation data, which are more scien-tific, replicable, and accurate for capturing actual behaviors.

What do such expropriation data tell us about the relationship between regime type and expropriation? Before presenting the evidence, I first define the concepts and measures. According to Dahl (1971, 1998), rep-resentative democracy is the political regime that allows free and fair elections of the executive and legislative offices, the right of citizens to vote and compete for public office, and institutional guarantees for the freedom of association and expression (e.g., an independent judiciary, the absence of censorship). In contrast, autocracy does not allow com-petitive elections, and it is often associated with the existence of a single leader or a small ruling clique, weak political mobilization, and legal limitation on pluralism (e.g., Linz, 2000). For measurement, I use the minimalist definition of democracy found in the work of Alvarez, Cheibub, Limongi, and Przeworski (1996) and Przeworski, Alvarez, Cheibub, and Limongi (1996, 2000). A country is coded as democratic if the opposition has some chance of winning and taking office, through elections.1 Otherwise, a country is treated as an autocracy.

Following Kobrin (1980, 1984) and Minor (1994), expropriation refers to the forced divestment of equity ownership of a foreign direct investor.2 Such divestment behavior is involuntary, against the will of the owners and managers of the enterprise, and so must entail divestment of equity owner-ship across national borders, involving managerial control. An expropria-tion act is an event that applies to all firms within an industry (typically, a three-digit Standard Industrial Classification code) per country year.3

According to Kobrin (1980, 1984) and Minor (1994), 575 expropriation acts against foreign multinationals, committed by 79 developing countries, occurred from 1960 to 1992.4 Because of missing data on democracy, we lose 52 expropriation acts and 14 countries. So among the 523 expropria-tion acts in 65 countries between 1960 and 1990, democratic governments committed 97, less than 20% of the total, with the remaining 426 in autoc-racies.5 Because the period witnessed more autocratic regime years (n = 1,403) than democratic ones (n = 439), a more accurate comparison is com-puted for the number of regime years per act. It takes an average of 4.5 years for a democracy to perpetrate one expropriation act but 3.3 years for an autocracy. By either measure, democracies remain less appropriative than autocracies.6 However, the distributional patterns within regime type are very telling. Between autocracy and democracy, the minimum–maximum ranges in the count of expropriation acts are 0–25 and 0–16, respectively, whereas the sample variances are 1.47 and 1.04. Both regime types exhibit


large variations in expropriation activities. Democracies may be aggressive whereas autocracies, quiescent.

Theoretical Argument

Democracies expropriate less than autocracies, an observation that has not been tested in any statistical model using actual expropriation data. More important, the pattern of expropriations demonstrates large variances in both democracies and autocracies. So, what makes democracies less appropriative than autocracies? Are checks and balances the only causal explanation? Why do democracies sometimes expropriate FDI, and why do autocracies sometimes refrain from expropriation?

To address these questions, my theoretical argument focuses on the deci-sion making of individual leaders.7 The theory relies on several premises: First, FDI is structurally vulnerable to the risk of expropriation; second, leaders want to stay in office, using expropriation as a policy instrument; third, variations in the time horizon of leaders lead to different expropria-tion behaviors; fourth, leader tenure and past leadership turnover are good predictors of the risk of losing office; and, fifth, leaders are often institu-tionally constrained to varying degrees. Built on these premises, the argu-ment explains the differences and similarities in expropriation between democratic and autocratic leaders.

I begin by establishing why FDI is structurally vulnerable to the risk of expropriation, given that this property makes expropriation a possible pol-icy tool. FDI refers to the purchase of physical assets or a significant amount of the ownership (i.e., stock) of a company in another country to gain a measure of management control. Almost by definition, FDI is rela-tively illiquid ex post8 and so involves cross-border jurisdiction; both attributes have important implications for the property rights of foreign investors (see, e.g., Frieden, 1994; Vernon, 1971). FDI makes cross-border jurisdiction inevitable, subjecting MNC affiliates to the host’s laws and regulations. The host government monopolizes the coercive power to define and enforce property rights within its territory. Neither the legal status of expropriation nor the standard of compensation for expropriation has been clearly established in international law, thus giving further discretion to the host government (Easton & Gersovitz, 1983; Thomas & Worrall, 1994). In other words, the host government is not held legally accountable to any other higher authority when it breaks its promise to protect foreign assets. Hence, the host government’s ex ante promise to protect foreign assets lacks credibility. Because the host–MNC contract is incomplete and so does


not anticipate all contingencies, the government may resort to contingen-cies (e.g., war) and renege on its commitment ex post. Hence, FDI is inher-ently vulnerable to the risk of expropriation.

Despite the inherent vulnerability, FDI is seldom expropriated. Leaders decide to expropriate foreign investment when they sense political insecu-rity, have short time horizons, and confront few institutional constraints. As influenced by regime characteristics, these factors determine the expropria-tory incentives and capacities of host country leaders.

Expropriatory Incentive, Leadership Turnover, and Leader Tenure

A leader’s expropriatory incentive depends on the difference in gains between nonnationalization and expropriation (see, e.g., Thomas & Worrall, 1994). These gains are discussed in economic terms, but they are politically related to the interest of key constituencies who support the leader. The ben-efits of refraining from expropriation could be large. Investments operated by foreign investors tend to be more efficient and profitable than the same assets expropriated and operated by host governments.9 This is especially likely where ownership-specific intangible assets, such as technological know-how, managerial skills, and access to the international market, are important to the production and marketing of high-quality products (Dunning, 1988, 1993). When left alone, foreign investments are likely to generate a larger stream of revenue and, arguably, more technology spillovers that benefit the host economy. In addition, foreign affiliates typically pay wage rates higher than those of their host competitors (Lipsey, 2002) so that individual employees may benefit less financially from expropriation. Finally, whereas expropria-tion tarnishes the host’s reputation among foreign investors and so reduces future investment inflows, successful international production often leads to higher reinvestment; it attracts other investors to come and compete for the host market share; and it produces conglomeration effects in the economy. The benefits of nonexpropriation accumulate over time. The longer the leader’s time horizon, the larger the benefits of nonexpropriation are.

Expropriation, however, brings important gains to the government (see, e.g., Kobrin, 1980, 1984; Lipson, 1985; Thomas & Worrall, 1994). It trans-fers output and physical asset ownership from the MNC to the host. The onetime transfer creates an immediate windfall. The acquired payoffs can be immediately applied to strengthen the leader’s political position. In addi-tion, the ability to directly manage the assets gives the leader greater autonomy in pursuing national political economic objectives. And expro-priation can end the sometimes unfavorable terms negotiated between MNCs


and local elites. But the benefits of expropriated autonomy tend to dwindle over time. Many developing host countries often lack the necessary human capital and bureaucratic expertise to manage expropriated assets as effi-ciently as the MNCs. Although physical assets can be taken relatively easily (i.e., coercively), the intangible assets that make foreign affiliates efficient and competitive are difficult to appropriate. Over the long run, state-owned enter-prises have been widely shown to deliver poor economic performance, become highly inefficient, and require persistent subsidies (e.g., Megginson & Netter, 2001; Minor, 1994). Hence, the gains from expropriation often concentrate in the short run.

If the government expects its benefits from nonexpropriation (which tend to accumulate over the long run) to be more attractive than its gains from expropriation (which tend to concentrate in the short run), the host–MNC contract is self-enforcing, and the government is unlikely to take foreign assets coercively. But if the host finds the short-term gains more appealing, then it has an incentive to expropriate foreign investment. Hence, the leader’s time horizon influences the incentive for expropriation. A leader with a long time horizon is likely to leave MNCs alone, whereas one with a short horizon may pursue expropriation for immediate payoffs.

Given that all leaders are presumably interested in staying in power, their perceptions of political security thus determine their time horizon (Geddes, 1994). When leaders feel politically secure, they tend to adopt a long-term view (and vice versa). Previous work (e.g., Cheibub, 1998) shows that the turnover rate of the chief executive and the incumbent’s tenure to date influence the leader’s time horizon and perceived political security. Leaders in countries with frequent executive turnover may expect a high risk of losing office and thus adopt short time horizons. And leaders who have long been in office are likely to feel politically secure and thus hold long time horizons. Because the length of the leader’s time horizon is negatively related to the incentive to expropriate foreign assets, frequent executive turnover should induce expropriations, whereas long leader tenure reduces the incentive to do so.

Do these effects of executive turnover and leader tenure hold in both democracy and autocracy? Although the leader’s time horizon has the same effect on expropriation in both regime types, institutional attributes that distinguish them, such as regular competitive elections and term limits, cause executive turnover and leader tenure to produce distinct effects in the two regime types.

Democracy provides “regular constitutional opportunities for changing the governing officials” (Lipset, 1960, p. 27), whereas autocracy forbids regularized competitive election. The presence or absence of regular com-petitive elections has important implications for losers in the contests for


power. In democracy, elections and government turnover introduce institu-tionalized policy uncertainty (Przeworski, 1991); leaders compete vigorously for office; competitors follow the rules of the game; and government turnover is often expected and regular. The winners live and let live, and the losers concede their defeat and move on with their lives. In autocracy, losing office often involves higher stakes in terms of wealth and personal security such that the autocrat has a stronger incentive to repress opposition and hold onto power (Olson, 1993). Because autocrats strategically react to the anticipated risk of turnover, their turnover becomes irregular. Suppose that two countries, one a democracy and the other an autocracy, have frequent executive turno-ver. With all else being equal, the democratic leader, bound by the institution-alized rules of the game, will heavily discount the future and so adopt a short time horizon. Yet a forward-looking autocrat will use every means possible to repress anticipated opposition and expand power, to not replicate the frequent turnover of predecessors. A forceful autocrat may exert a firm grip on power and thus not adopt a short time horizon. As such, the executive turnover rate is a better predictor in democracy than in autocracy as it pertains to the lead-er’s time horizon and risk of losing office. Executive turnover should explain expropriation behaviors in democracy but not necessarily so in autocracy.10

In contrast, leader tenure ought to explain expropriation in autocracy but not in democracy. Because of competitive elections, term limits, and regular-ized leadership turnover, having been in office for a long time does not imply that democratic leaders will continue to stay in power. When reelection is no longer a viable option, how leaders discount the future becomes unclear. To the extent that they seek to help their parties win elections, leaders may take a long-term view. Even then, leaders may still expropriate FDI for political gains to strengthen the positions of their parties in the short run. The effect of leader tenure on expropriation appears indeterminate in democracy.

The effect of leader tenure is more clear-cut in autocracy, resembling Olson’s stationary bandit effect (1993). Compared with roving bandits, station-ary bandits have a firm grip on power and thus expect to reap revenues from their subjects for a long time. Out of self-interest, they refrain from predating on their subjects. Stable autocrats with a long time horizon behave as stationary bandits and so establish secure property rights (McGuire & Olson, 1996; Olson, 1993).11 Given this logic, autocrats who have long been in power gener-ally expect large gains from future operations of foreign affiliates. Expected future benefits prevent them from expropriating foreign investment.12 It is not surprising that autocrats often reportedly repress and keep at bay the opposition to MNCs (e.g., O’Donnell, 1978, 1988).


Expropriatory Capacity and Executive Constraints

To adopt and implement a controversial policy such as expropriation, the leader has to overcome the political constraints on his office. The leader’s policy-making capacity is fettered by the number of veto players and the pref-erence heterogeneity among them (Tsebelis, 1995, 2002). When the number of veto players is large and their preferences are heterogeneous, policy change is difficult. In the case of government commitment to private property, increas-ing the number of veto players who have stakes in property rights violations helps prevent the state’s opportunistic behaviors and so improve the credibility of government commitment (North & Weingast, 1989). The existence of mul-tiple veto players with diverse preferences prevents any individual player from single-handedly changing the status quo, thereby reducing state depredation against business. Political constraints and veto players are empirically shown to promote economic growth, particularly in poor countries, and so encourage the entry of multinational firms (Henisz, 2000a, 2000b).

According to a recent modified version of the North–Weingast credible commitment argument (Stasavage, 2002a, 2002b), to anticipate the actual effect of political constraints on any policy issue may require the analyst to know the distribution of policy preferences among the veto players, the existence of cross-issue coalitions, and the degree of delegation. Checks and balances generally increase government credibility, but they are neither necessary nor sufficient. Yet, increased political constraints are empirically associated with not only higher levels of private investment but a lower conditional variance in private investment (Stasavage, 2002b).

Given these arguments on credible commitment, the leader’s political capacity to expropriate foreign investment depends on the number of veto players and the distribution of their preferences toward foreign investment.13 As the number of veto players with divergent preferences toward MNCs rises, the likelihood of expropriation should decline. This expectation applies to both regime types, for two reasons. First, the number of veto play-ers varies in democracies and autocracies. As Tsebelis (1995, 2002) argues, democracies such as Westminster systems, dominant-party systems, and single-party minority governments often have only one veto player, whereas many nondemocratic regimes have multiple veto players.

Second, FDI produces stakeholders with competing interests in the host economy. Compared with host firms, MNCs possess ownership-specific advantages in terms of intangible assets, such as product innovations, man-agement skills, marketing techniques, and brand names. By establishing hierarchical control over production across borders, MNCs protect their intangible assets, achieve economy of scale, and acquire internalization


advantages (e.g., Caves, 1996; Dunning, 1988, 1993). Implications of these attributes divide interests within the host economy into groups with com-peting preferences over FDI. Certain individuals and groups in the host country benefit from the foreign capital of MNCs, their advanced technol-ogy and managerial skills, the higher employment and wage rates that they arguably bring to the host economy (see, e.g., Lipsey, 2002). Yet, FDI marginal-izes and harms certain individuals and groups in the country because MNCs threaten rival host firms, increase the economic insecurity of workers, and widen income inequality (e.g., Aitken & Harrison, 1999; Gorg & Strobl, 2003; Reuveny & Li, 2003; Scheve & Slaughter, 2004). Competing inter-ests over FDI exist in both regime types. Therefore, with all else being equal, democratic and autocratic governments are unlikely to expropriate FDI in the presence of a large number of veto players with competing pref-erences over MNCs.

Although it is difficult (at least at the moment) to measure the distribution of preferences toward FDI among the veto players, one may reasonably surmise that the larger the number of veto players in a country, the more likely competing interests over FDI are represented, hence, the fewer expro-priation acts the host will commit against multinationals. To the extent that this conjecture does not hold (one contrary case could be that of multiple veto players’ having converging preference in favor of FDI), supporting statistical evidence for the argument should be hard to find.

Despite facing the similar effect of checks and balances, the two regime types differ markedly in their average levels of constraints on the chief executive. In democracy, the legislature consists of competing political inter-ests, and the size of the winning coalition is large (e.g., Bueno De Mesquita, Smith, Siverson, & Morrow, 2003; North & Weingast, 1989); that is, repre-sentative democracy allows various interests to compete for office and rep-resentation in the legislature. Politicians need to acquire enough votes from the electorate to win and stay in office. Przeworski (1991) noted,

Since under the shared constraints outcomes are determined only by actions of competing political forces, democracy constitutes for all an opportunity to pursue their respective interests. . . . Modern representative democracy gener-ates outcomes that are predominantly a product of negotiations among leaders of political forces rather than a universal deliberative process. (p. 13)

As a result, checks and balances, multiple veto players, and the diversity of interests are more likely to emerge in democracy. In comparison, the number of veto players is often small in the autocracy dominated by a sin-gle leader or a small ruling elite.


Summary and Hypotheses

In a decision-theoretic conception, a leader takes past leadership turnover, one’s own tenure, and institutional constraints as being given at each time point and so makes the decision whether to expropriate FDI or not. Assuming that these are fixed givens, we identify the ceteris paribus effects of leader tenure, leadership turnover, and political constraints on expropria-tion and thus spell out the hypothesized differences between democracy and autocracy: Hypothesis 1 reiterates the difference in expropriation between regime types (not tested before). Hypothesis 2 attributes that difference to leaders’ incentives and capacities. Hypotheses 3–5 summarize how political constraints, leadership turnover, and leader tenure affect expropriation in the two regime types.

Hypothesis 1: Democracies expropriate foreign investment less frequently than autocracies.

Hypothesis 2: The regime type disparity in expropriation hinges on differ-ences in political constraints, leadership turnover, and leader tenure.

Hypothesis 3: Leadership turnover increases expropriations in democracies but not in autocracies.

Hypothesis 4: Leader tenure reduces expropriations in autocracies but not in democracies.

Hypothesis 5: Political constraints on leaders reduce expropriations in both regime types, but democracies generally impose more constraints on their leaders than do autocracies.

Research Design: Data and Method

I test the hypotheses using regression analysis in a sample of 63 coun-tries from 1960 to 1990.14 The dependent variable is the annual number of expropriation acts in a given country. Data are from Kobrin (1980, 1984) for the 1960–1979 period and from Minor (1994) for the 1980–1990 period. The focus is on the pre-1990 period not only because of data avail-ability but because of substantive reasons. Although the theoretical argu-ment should travel to the post-1990 world, the international system in the period witnessed the end of the Cold War, the rise of the World Trade Organization, and the rapid expansion of regional trade agreements. These paradigmatic changes justify a separate analysis of the post-1990 period.

As noted earlier, the dichotomous measure of regime type is from the work of Alvarez et al. (1996) and Przeworski et al. (1996, 2000), coded 1 for democracy


and 0 for autocracy. The variable of executive turnover indicates the turnover rate of the chief executive in a given year: It is calculated as the number of chief executive changes during the consecutive cumulative years of life of a country’s political regime type (democracy or autocracy), divided by the con-secutive cumulative years of life of the regime type, for any given year. The variable of leader tenure refers to the chief executive’s length of tenure in office to date, as measured in number of years. These two variables predict future leadership turnover given that they influence leaders’ perceptions of their risk of losing office. Previous studies (e.g., Cheibub, 1998) also employ these indicators to capture the time horizon and political insecurity of leaders. Data on executive turnover and leader tenure are from Alvarez et al. (1999).

To measure the impact of veto players, I use Henisz’s political constraints index (2000b), which uses information on (a) the number of independent branches of government with veto power over policy change (including the executive branch and the lower and upper legislative chambers), (b) the degree of alignment across branches of government based on the party com-position of each branch, and (c) the degree of preference heterogeneity within each legislative branch. For the index, each additional veto point not only has a positive but diminishing effect on the level of constraints on policy change but also causes the homogeneity of party preferences within an opposition branch of government (or the heterogeneity within an aligned branch) to raise the level of constraints.15 For robustness check, I also employ an alternative measure of the executive constraints from the Polity IV database (Marshall & Jaggers, 2000). The variable measures the extent of institutionalized constraints on the decision-making power of chief executives, thus reflecting the checks and balances in the policy-making process. The index is based on a 7-point scale, with 1 indicating unlimited authority and 7 denoting executive parity or subordination.

To test Hypotheses 3 to 5 requires separating the effects of executive turnover, leader tenure, and political constraints for the two regime types. Thus, I construct the following measures per regime type: executive turnover, political constraints, and leader tenure. These variables capture the behavioral implications that result from institutional differences between regime types in terms of competitive election, term limits, and political participation.

I also include and test many variables that the literature identifies as causes of expropriation, including GDP per capita and its squared term, economic growth, the lagged dependent variable, temporal dependence controls, and total past expropriation acts. All the economic variables are lagged 1 year to control for possible reverse causality. I discuss the effects of these economic variables as revealed by previous research. First, the


effect of GDP per capita on expropriation is curvilinear, rising at the low level of economic development and declining after passing a certain thresh-old (Jodice, 1980). Second, economic growth, measured by the annual growth rate of per capita income, reflects the overall economic conditions in a country. It reflects the impact of economic dislocations and recessions and correlates with currency and banking crises. Low economic growth encourages more expropriation acts. Third, the lagged dependent variable serves to control for the behavior of the previous period and other potentially relevant variables absent from the model. Fourth, since the mid-1970s, host expropriations showed a decline across countries (Kobrin, 1984; Minor, 1994), albeit with variations among them. To control for duration depend-ence in countries for years without expropriation, I include in the regression the nonexpropriation year counter and three cubic spline variables (see Beck, Katz, & Tucker, 1998). Finally, investors are forward looking and so avoid host countries that have expropriated foreign assets. The amount of FDI available for expropriation in such countries would be less than in those without the reputation. Hence, some countries expropriate less, not because of preference, but because they have already seized most of what is available. In the absence of FDI stock data for the early years, I use the number of past expropriation acts in a country until the previous year, to control for the effect of spoiled reputation and strategic behaviors by forward-looking investors. This variable has a negative sign.

Because the dependent variable is an event count, ordinary least squares estimates can be inefficient, inconsistent, and biased (Long, 1997). Although Poisson regression is often used to model event count, it imposes the restrictive assumption that the conditional mean equals the conditional variance. This assumption is not likely true, even with the values of the unconditional means and the variance of the dependent variable (not reported). Negative binomial regression addresses this problem by includ-ing an overdispersion parameter, allowing the conditional variance to exceed the conditional mean (Cameron & Trivedi, 1998). Given the pooled design of the data, I apply the negative binomial fixed effects model of Hausman, Hall, and Griliches (1984). The advantage of the model is that it allows for the individual-specific fixed effect and the overdispersion param-eter by conditioning them out of the likelihood function. The disadvantage of the model is that it does not work as a typical fixed effects estimator and so fails to completely eliminate the individual-specific time-invariant het-erogeneity (Allison & Waterman, 2002). Hence, robustness tests based on alternative estimators are necessary.


Findings

This section first discusses the findings from a preliminary data analysis, then the results from the statistical model. Table 1 presents evidence on the relationships between (a) political constraints, executive turnover, and leader tenure and (b) expropriations for 65 countries in the 1960–1990 period. First, democracies with high executive turnover (i.e., above the mean level) committed 70 expropriation acts, accounting for more than 72% of the total. They have 43 acts more than those with low executive turnover. More accurately, it takes about 3 years for a democracy with high executive turnover to commit one expropriation act but about 9 years for a democracy with low executive turnover. In contrast, autocracies above their own mean turnover rate commit one act every 3.5 years, which is actually slightly longer than that for those with low executive turnover. The pre-liminary evidence is consistent with Hypothesis 3.

Second, among the 97 expropriation acts in democracies, 29 acts occurred under leaders with tenure above the sample mean, whereas 68 occurred under leaders with tenure below the mean. It took the former 5.9 years to commit one act and the latter 3.9 years. Out of the 426 expropriation acts in autocra-cies, autocrats with long leader tenure committed 93, whereas roving-bandit autocrats (i.e., with tenure below the sample mean) committed 333. It took the former 5.5 years to commit one expropriation act but the latter only 2.7 years. The preliminary evidence supports a negative relationship between leader tenure and expropriation acts in both regime types.

Finally, democracies with high political constraints committed 46 expropriation acts, 5 acts fewer than those with political constraints below the mean. It took the more constrained democracy 5.7 years to commit one act and the less constrained, only 3.3 years. For autocracies, the pattern is similar. Autocracies above the mean performed one expropriation act every 8 years, whereas those less constrained, every 3 years.16

Figure 1 compares the distribution of political constraints between democracy and autocracy for our sample of countries. The box plot denotes the median, the 25th and 75th percentiles, the upper and lower adjacent values, and the outside values of both measures of political constraints for each regime type. Despite their differences in measurement and scale, both indicators demonstrate that democracy generally imposes a much higher level of political constraints on its leader. Not all democracies have a high level of political constraints, just as not all autocracies have minimal political constraints. The results in Figure 1 and Table 1 support the expec-tations in Hypothesis 5.


Though informative, the preliminary analysis does not provide rigorous statistical tests of the hypotheses. The results could be either artifacts of confounding factors or random noise in the data. Table 2 presents the statistical

Table 1Variable Effects on Expropriations in Democracy

and Autocracy: 65 Countries, 1960–1990

Variable Above Mean Below Mean Total

Executive turnover Democracya

Expropriations 70 27 97Regime years 201 238 439Regime years per expropriation act 2.9 8.8 4.5

Autocracyb Expropriations 143 283 426 Regime years 502 901 1,403Regime years per expropriation act 3.5 3.2 3.3

Leader tenure to date Democracyc


Autocracyd Expropriations 93 333 426Regime years 507 896 1,403Regime years per expropriation act 5.5 2.7 3.3

Political constraints Democracye


Autocracyf Expropriations 27 392 419Regime years 220 1,153 1,373Regime years per expropriation act 8.2 2.9 3.3

Note: Above mean and below mean refer to the variable of interest (executive turnover, leader tenure, or poltical constraints). Data reflect the number of expropriations and the number of regime years (total and per act).a. M = 0.18.b. M = 0.12.c. M = 3.50 years.d. M = 8.00 years.e. M = 0.33.f. M = 0.04.


findings from regression analysis. Across the models, the control variables have effects that are consistent with the expectations in the literature. The effect of real GDP per capita is positive and statistically significant, whereas that of its squared term is negative and significant. As income rises, the number of expropriation acts first increases and then declines. Economic growth has a statistically significant negative effect on expropriation. Under favorable national economic conditions, the host is less likely to expropriate foreign investment, but economic slowdown induces more expropriation acts. The effect of expropriation history is statistically significant and nega-tive. This finding is consistent with the expectation that investors avoid countries that have expropriated, thereby giving such countries fewer expro-priation opportunities in the future. The lagged dependent variable has a statistically significant positive effect, suggesting that countries that did not expropriate the previous year are less likely to do so during the current year. These findings give us confidence in our model of expropriation behaviors.

Now, moving to the key variables, the results are consistent with the theoreti-cal expectations. Model 1 shows that democracies expropriate less frequently than do autocracies, a statistically significant finding. Once Model 2 controls

Figure 1Distribution of Political Constraints in Autocracy and Democracy

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Table 2Effects of Political Institutions on Expropriation

Acts in 63 Countries (1960–1990)

Model 1 Model 2 Model 3 Model 4 Model 5

Democracy –0.443* 0.032 –0.595 dummy (0.242) (0.300) (0.473) Political –2.684*** –4.180*** constraints (0.762) (1.357) Executive 0.988*** 0.572 turnover (0.340) (0.664) Leader tenure –0.035** –0.041*** (0.014) (0.015) Democracy –2.504*** 2.402 –0.212***

constraints (0.773) (1.636) (0.067)Autocracy –4.058*** –0.120+

constraints (1.354) (0.081)Democracy 0.983*** 0.628 1.064***

executive (0.357) (0.754) (0.367) turnoverAutocracy 0.797 0.747 executive (0.637) (0.683) turnoverDemocracy –0.014 0.060 0.025 leader (0.045) (0.054) (0.049) tenureAutocracy –0.036** –0.046*** leader (0.015) (0.017) tenureExpropriation –0.064*** –0.064*** –0.063*** –0.063*** –0.057***

history (0.012) (0.012) (0.012) (0.012) (0.013)Lagged 0.124*** 0.107*** 0.106*** 0.102*** 0.098*** dependent (0.027) (0.028) (0.028) (0.028) (0.029) variableGDP per 4.420e–04** 4.810e–04** 4.740e–04** 4.890e–04** 2.827e–04 capita (1.913e–04) (2.042e–04) (2.068e–04) (2.062e–04) (1.931e–04)GDP per capita –3.771e–08* –3.902e–08* –3.977e–08* –4.179e–08* –2.282e–08 squared (2.291e–08) (2.333e–08) (2.375e–08) (2.397e–08) (2.205e–08)Growth rate –0.021** –0.021** –0.021** –0.021** –0.017*

(0.009) (0.009) (0.009) (0.009) (0.009)Constant –0.917*** –0.634** –0.601* –0.542* –0.150 (0.276) (0.317) (0.323) (0.326) (0.394)Observations 1,758 1,737 1,737 1,737 1,705

Note: Standard errors in parentheses. Nonexpropriation year counter and cubic spline varia-bles not included in table. GDP = gross domestic product.*p < .10; **p < .05; ***p < .01, two-tailed test. +p < .10, one-tailed test.


for political constraints, executive turnover, and leader tenure, the coefficient of the democracy variable becomes statistically insignificant. These factors explain the sources of the difference in expropriation between democracy and autocracy. These results support both Hypotheses 1 and 2.

Model 3 tests Hypotheses 3–5. The effect of executive turnover is positive and statistically significant in democracy but statistically insignificant in autocracy. Frequent leadership turnover encourages the democratic leader to expropriate more frequently, but this is not so in autocracy. These findings are consistent with Hypothesis 3. The effect of leader tenure is negative and sta-tistically significant in autocracy but insignificant in democracy. Leader tenure has no effect on expropriation in democracy, but it decreases the number of expropriation acts in autocracy. These findings support Hypothesis 4. Political constraints reduce expropriation acts in both democracy and autocracy, as expected. In fact, an equality test of the coefficients of the two constraints variables fails to reject the null hypothesis that they are the same between the two regime types (p = .30). These results support Hypothesis 5.17

Instead of testing Hypotheses 3–5 directly in Model 2, one may test them indirectly using the following alternative specification:

y = b0 + b1 democracy + b2 constraints + b3 (democracy × constraints) + b4 turnover + b5 (democracy × turnover) + b6 tenure +

b7 (democracy × tenure) + bk Z + ε,

where y denotes the number of expropriation acts, Z denotes the control vari-ables, and ε is the error term. Given that democracy denotes the democracy dummy, b1 measures the difference between democracy and autocracy when all three interaction terms are equal to zero (not a likely scenario). Hypothesis 3 implies b4 = 0 (autocracy), b4 + b5 > 0 (democracy); Hypothesis 4 implies b6 < 0 (autocracy), b6 + b7 = 0 (democracy); Hypothesis 5 implies b2 < 0 (autocracy), b2 + b3 < 0 (democracy). Model 4 in Table 2 presents results from this alternative specification. The findings—with additional tests of the total effects of turnover, leader tenure, and constraints in democracy—provide evidence supporting these expectations. In other words, executive turnover increases expropriations in democracy (p = .002) but not in autocracy. Leader tenure reduces expropriations in autocracy but not in democracy (p = .71). Political constraints reduce expropriations in both regime types (p = .065 for democracy). These inferences are identical to those from Model 3.

Model 5 checks the robustness of the results of Model 3, employing the alternative Polity IV database measure of executive constraints. The results replicate those from Model 3, which demonstrates that the findings are not sensitive to the measure of political constraints.


Additional Robustness Tests

I conducted three sets of additional robustness tests, based on alternative statistical estimators, possible endogeneity issues, and additional control variables. Because of space constraint, the reported results focus on only the key variables from one specification (Model 3 in Table 2), and the discussion is kept brief (but all other results and related details are available upon request). The tests, as reported in Table 3, largely substantiate the robustness of the results in Table 2.

Alternative Estimators

Table 3 reports the results using three alternative statistical estimators—the population-averaged negative binomial estimator with robust standard errors, the negative binomial estimator with robust standard errors, and the uncondi-tional fixed effects negative binomial estimator with country dummies and robust standard errors.18 All three estimators produce robust statistical results, with a couple of exceptions. Democracies remain associated with fewer expro-priations than do autocracies across all three estimators, but the effect is unsur-prisingly weaker in the unconditional fixed effects model. As expected, across all three estimators, political constraints reduce expropriation acts in both regime types; leader tenure reduces expropriations in autocracy but not in democracy; and executive turnover increases expropriations in democracy. Different from in Table 2, executive turnover in autocracy now significantly reduces expropriations for the first two estimators while significantly increas-ing expropriations for the third. This may well reflect the theoretically antici-pated indeterminate effect of executive turnover in autocracy.

Endogeneity Issues

The results in Table 2 are not likely an artifact of possible reverse causation from expropriation to political constraints, executive turnover, or leader tenure. First, the level of political constraints tends to be institutionally stable, and as shown, its effect is not sensitive to measurement. Second, if reverse causation exists, we should not have found the effects of executive turnover in autocracy, and leader tenure in democracy, to be statistically insignificant.

Still, Table 3 reports two endogeneity-related tests. The first test (Column 7) excludes nine countries that may have reverse causation for political constraints (three countries), democratic executive turnover (three countries), and auto-cratic leader tenure (four countries), based on by-country Granger causality


Table 3Sensitivity Analysis

Variable 1 2 3 4 5 6 7 8

Estimators and endogeneitya

Democracy –0.499** –0.473** –0.363 dummy (0.253) (0.212) (0.309) Democracy –3.082*** –3.155*** –2.602** –2.984*** –5.061***

constraints (0.622) (0.671) (1.119) (0.954) (1.727)Autocracy –4.579*** –3.625*** –5.190*** –4.060*** –2.127**

constraints (0.990) (1.110) (1.435) (1.401) (1.073)Democracy 0.728*** 1.122* 1.605*** 0.928+ 0.434 executive (0.239) (0.572) (0.574) (0.625) (1.543) turnoverAutocracy –1.126** –1.051* 1.764*** 0.769 –0.417 executive (0.563) (0.558) (0.679) (0.756) (0.964) turnoverDemocracy –0.058 –0.036 –0.053 –0.017 0.034 leader tenure (0.046) (0.037) (0.049) (0.058) (0.042)Autocracy leader –0.055** –0.044** –0.046*** –0.041** 0.078***

tenure (0.026) (0.018) (0.018) (0.016) (0.028)Additional controlsb

Democracy –3.330*** –2.476*** –1.121 –2.610*** –2.683*** –2.441*** –2.476*** –2.589***

political (0.871) (0.774) (2.031) (0.789) (0.792) (0.772) (0.775) (0.775) constraintsAutocracy –4.513*** –4.048*** –7.056* –4.088*** –4.099*** –4.147*** –4.072*** –3.958*** political (1.560) (1.354) (4.062) (1.363) (1.398) (1.377) (1.351) (1.372) constraintsDemocracy 1.148*** 0.838* –0.032 0.980*** 0.997*** 0.960*** 0.984*** 0.986***

executive (0.376) (0.454) (0.839) (0.358) (0.370) (0.359) (0.356) (0.360) turnoverAutocracy 0.667 0.812 –5.918*** 0.814 0.888 0.755 0.820 0.844 executive (0.801) (0.636) (2.120) (0.638) (0.696) (0.657) (0.635) (0.646) turnoverDemocracy 0.019 –0.013 –0.116 –0.015 –0.015 –0.008 –0.014 –0.017 leader (0.051) (0.045) (0.071) (0.045) (0.046) (0.045) (0.045) (0.045) tenure Autocracy –0.047*** –0.036** –0.059* –0.036** –0.043*** –0.033** –0.037** –0.039***

leader tenure (0.016) (0.015) (0.032) (0.015) (0.015) (0.015) (0.015) (0.015)

Note: Standard errors in parentheses.a. Columns 1–2: generalized estimating equation with robust standard errors. Columns 3–4: negative bino-mial with robust standard errors. Columns 5–6: unconditional fixed effects negative binomial with country dummies and robust standard errors. Columns 7–8: endogeneity tests.b. Column 1: capital account restriction. Column 2: democratic transition. Column 3: left government. Column 4: income inequality. Column 5: riots, strikes, and war. Column 6: oil and primary commodity exporters. Column 7: regional trade agreement memberships. Column 8: first 3 years of independence.*p < ;10. **p < .05; ***p < .01, two-tailed test. +p < .10, one-tailed test.


tests. The results for all six key variables are consistent with those in Table 2. The second test (Column 8) uses the average political constraints, average executive turnover, and average leader tenure of a country’s neighbors as instrumental variables, with regional dummies added to control for common shocks in the same region. The rationale for the instruments is that these vari-ables in a country’s neighbors tend to correlate with those in the country itself but not necessarily with its expropriation behaviors. Apparently, the validity of this assumption determines the validity of the instruments. With that caveat in mind, political constraints still reduce expropriations in both regime types, and leader tenure in democracy and executive turnover in autocracy still have a statistically insignificant effect. But leader tenure now increases expropriations in autocracy, whereas executive turnover in democracy turns insignificant. Overall, the evidence for the influence of endogeneity is weak.

Additional Control Variables

Even though the lagged dependent variable is expected to control for poten-tially relevant but omitted factors,19 Table 3 reports eight models that control for various possible confounding factors. These additional variables intend to con-trol for the negative effect of capital account restriction (column 1), the redis-tributive bias of democratic transition (column 2), the ideological bias of left government (column 3), the positive impact of income inequality (column 4), the positive influence of domestic instability (riots, strikes, and war; column 5), the greater risk of expropriation in oil and primary commodity exporters (column 6), the negative protective effect of regional trade agreement mem-berships (column 7), and the positive tendency to expropriate in the first 3 years of independence due to decolonialization (column 8). In these models, the results for the six key variables remain robust and consistent with those in Table 2. A couple of exceptions occur but only in the model with leftist ideology. In this model, the effect of political constraints in democracy turns insignificant, and executive turnover now has little effect in democracy, although it does reduce expropriations in autocracy. One possible reason for the few exceptions is that the sample size is less than half of that in Table 2 and so includes only 81 expropriation acts, thus leaving little variation in the dependent variable to explain. Another possible reason is that ideologically motivated expropriations concentrated in a few countries from 1960 to 1979 (Algeria, Angola, Chile, Ethiopia, Indonesia, Mozambique, Peru, Tanzania, Uganda, and Zambia) or largely declined after 1960 (Kobrin, 1980, 1984; Lipson, 1985). Overall, the results for the key variables are quite robust.20


Conclusion

How do domestic political institutions affect expropriations against mul-tinationals? Although recent events reaffirm the relevance of this question, it has received little theoretical and empirical scrutiny in international busi-ness, economics, and political science. Stylized evidence demonstrates that democracies and autocracies both expropriate foreign investment but that democracies do so less frequently. Seeking to explain the effect of regime type on expropriation, I argue that the chief executive’s political incentive and policy-making capacity determine the host government’s expropriation decisions. The frequency of past leadership turnover and the length of the incumbent’s tenure influence the leader’s time horizon and expropriatory incentive, but these effects vary by regime type. The leader’s expropriatory capacity depends on the level of political constraints for both regime types. The argument helps to account for the similarities and differences in expro-priation between democracies and autocracies.

In my argument, democracy is not a panacea for eliminating the expro-priation risk. Democracies are most likely to expropriate FDI when leaders face little political constraint and reside in countries with frequent past leadership turnover. In contrast, autocracies are not always appropriative. Autocrats are least likely to expropriate foreign investment when they face high political constraints and when they have been in power for a long time. These expectations receive empirical support in an analysis of 63 develop-ing countries from 1960 to 1990.

Some limitations point to future research possibilities. First, the theoreti-cal argument takes past leadership turnover, leader tenure, and institutional constraints as givens, but tenure expectations and institutional constraints could be mutually endogenous. Sorting out the causal feedback requires a game-theoretical framework that models the leader–opposition political competition, the possibility of institutional reform, and relevant policy choices. Second, expropriation also involves strategic interactions between firms and governments, which further complicate the leader–opposition interaction. Third, although this article focuses on the chief executive, future research may study the involvement of administrative agencies and legisla-tors. Fourth, the empirical analysis should expand to include events in the past decade and a half. Finally, this article focuses on involuntary divest-ment, but many governments have learned to use more subtle forms of creep-ing expropriation; as such, future research ought to look into this issue.

Despite the shortcomings, this research makes several theoretical and empirical contributions to the studies of property rights, rule of law, investment


behaviors, and privatization reforms. First, the rule of law has attracted wide attention in recent years because it affects the success of transitional economies, democratic transition and consolidation, and the effects of democracy on growth. Previous theoretical work in the literature on prop-erty rights and rule of law (e.g., North & Weingast, 1989; Olson, 1993, 2000) has focused on the democratic advantage in providing better property rights institutions that hinge on greater political constraints on the execu-tive. This research emphasizes certain nuances. Checks and balances reduce expropriations in both regime types; that is, democracy is not alone in imposing constraints on the chief executive. Some autocrats also con-front strong constraints. But democratic leaders face, on average, higher levels of political constraints, thereby producing relatively fewer expropria-tions. The democratic advantage lies in their generally higher levels of political constraints. Maintaining political constraints on leaders is important for safeguarding the rule of law, particularly in transitional economies.

Second, the effect of political constraints in the literature on property rights has never been directly tested using data on actual property rights violations. Previous studies have relied on either objective proxies or sub-jective perceived risk measures (e.g., Clague, Keefer, Knack, & Olson, 1996; Frye, 2004; Jensen, 2003; Li, 2006; Li & Resnick, 2003). By employ-ing actual expropriation data, this analysis offers a better test of the deter-minants of property rights protection. This analysis is also the first to empirically evaluate the causes of actual FDI expropriations over a span of 30 years, using event count models.

Third, this research highlights the importance of leaders’ time horizon for the rule of law, and it uncovers the varying effects of leadership turnover and leader tenure across regime types. Under particular conditions, the rule of law can deteriorate in democracy but improve in autocracy. Frequent leader-ship turnover, as orderly as it is in democracies, motivates leaders to adopt short time horizons and so infringe upon private business. Autocratic leaders who have stayed in power for a long time are less motivated to do so and are thus associated with fewer violations of foreign assets.

Fourth, in the literature on how politics influence investment behaviors, some scholars (e.g., Frye, 2004; Henisz, 2000b; Stasavage, 2002b) suggest that greater political constraints generally encourage private investment. Others (e.g., Feng, 2001; Jensen, 2003; Li, 2006; Li & Resnick, 2003) argue that democracies attract investment, domestic and foreign, because they offer better property rights protection. This analysis provides direct empiri-cal support for part of these arguments by showing that checks and balances reduce expropriations and that democracies expropriate less often. It further


demonstrates how leaders’ time horizon influences property rights protec-tion and, by implication, private investment—an important issue that previ-ous research in this area has not directly addressed.

Fifth, to the extent that the rule of law is important for attracting invest-ment and promoting growth, this research has implications for the effect of regime type on growth. Democracies may have low investment and slow growth in conditions of little political constraint and frequent leadership turnover, and autocracies may enjoy high investment and fast growth in conditions of relatively high political constraints and long leader tenure. These lessons appear consistent with the growth experiences of many coun-tries in contemporary global economy.

Finally, this analysis has implications for the prospect of privatization reforms in economies less developed and transitional. Many scholars (e.g., Schmidt, 2000; Spiller, 1995) argue that for those reforms to succeed, gov-ernments must be committed to not subsequently expropriating the assets and returns of successful private firms. Given that foreign investors have purchased much of the privatized assets, this analysis informs us on the question of when government commitment to the privatization reform proc-ess is likely to be credible.

Notes

1. This minimalist definition requires that both the executive and the legislature be elected, that there is more than one party, and that the incumbent should have some chance of losing an election.

2. This definition does not cover creeping expropriation cases, where governments change taxes, regulation, access, and laws to reduce the profitability of foreign investment.

3. Kobrin (1980, 1984) and Minor (1994) suggest that aggregating expropriation acts to the industry level, as opposed to the individual plant level, allows greater comparability across heterogeneous industries. This avoids the absurd possibility of treating, say, a plantation and an oil field as being implicitly equivalent in worth. For regional, sectoral, and temporal distribu-tions of these expropriation acts, see Minor.

4. This count excludes four expropriation acts whose years are missing values. The number of countries is identified by comprehensive data collection through a variety of sources, excluding countries that did not commit any expropriation (per the definition) during the period. For details, see Kobrin (1980, 1984) and Minor (1994).

5. The ACLP data end at 1990 (see Alvarez, Cheibub, Limongi, & Przeworski, 1999), although there was no expropriation in 1991–1992 (Minor, 1994).

6. The pattern remains if we code a country as democratic when the widely used com-posite indicator Polity 2 from Polity IV is greater than 6 (Li, 2006; Marshall & Jaggers, 2000). Among 564 expropriation acts, democracies committed 59, whereas the remaing 505 were committed by nondemocracies.

7. One reviewer suggests that legislatures and bureaucracies are also relevant. Legislatures can pass expropriation legislation, whereas administrative agencies implement policies. My


theoretical argument incorporates the legislative impact in the institutional constraints on the chief executive but implicitly assumes that the bureaucracy is the perfect agent of the leader.

8. This does not mean that FDI is no longer mobile and that MNCs have an infinite time horizon. Divestment remains an option, and MNCs typically hold a finite time horizon, constantly adjusting firm strategies. But FDI is relatively more illiquid than other forms of investment, such as stocks.

9. Minor (1994) shows that much of the expropriated foreign investments were so unpro-ductive that they were sold back to foreign investors later in privatization reforms.

10. A box plot graphical comparison of the distributions of the chief executive turnover (not reported) shows that the median executive turnover rate is much higher in democracy than in autocracy; so is the 75th percentile value. These patterns are consistent with the expectation that autocratic leaders preemptively repress opposition, thereby preventing future leadership turnover and casting doubt on past executive turnover as an indicator of the leader’s time horizon in autocracy.

11. Clague, Keefer, Knack, and Olson (1996) find empirically, but do not explain why, the effect of leader tenure on several property rights indicators applies only to autocrats but not to democratic leaders.

12. A box plot graphical comparison of the distributions of leader tenure (not reported) shows that it is much more spread out in autocracy than in democracy. The median, 75th percentile value, and outside values all are much smaller in democracy than in autocracy. The disparity in the distribution pattern is consistent with the institutional differences between the two regime types and the weak association between leader tenure and political security in democracy.

13. The cross-issue coalition is also potentially relevant, but it is beyond the scope of this analysis.

14. The sample includes Algeria, Angola, Argentina, Bangladesh, Benin, Bolivia, Brazil, Cameroun, Central African Republic, Chad, Chile, Colombia, Congo, Costa Rica, Dominican Republic, Ecuador, Egypt, El Salvador, Ethiopia, Gabon, Gambia, Ghana, Guatemala, Guinea, Guyana, Haiti, Honduras, India, Indonesia, Iran, Iraq, Jamaica, Kenya, Liberia, Malagasy, Malawi, Malaysia, Mauritania, Mexico, Morocco, Mozambique, Myanmar, Nepal, Nicaragua, Niger, Pakistan, Panama, Peru, Philippines, Senegal, Sierra Leone, Somalia, Sri Lanka, Sudan, Swaziland, Syria, Tanzania, Thailand, Trinidad and Tobago, Uganda, Venezuela, Zaire, and Zambia. Based on the data of Kobrin (1980, 1984) and Minor (1994), 79 countries committed at least one expropriation act (according to the definition) during the period. Sixteen of the 79 countries dropped out of the sample in regression analysis because missing data on the inde-pendent variables. In addition, the analysis excludes those countries that never experienced any expropriation, because they may follow a qualitatively different causal process and because pooling the two types of countries may lead to biased estimates.

15. I use the POLCONIII_2002 index. Note that the measure controls for preferences by counting the number of political parties that control veto points rather than by employing actual information on preferences of veto players with regard to foreign investment. As noted, this makes it more difficult to find supporting evidence for our argument.

16. The contrast is even stronger if we separate autocracies using the democracy sample’s mean level of constraints. An autocracy as highly constrained as a democracy takes 22 years to commit one act.

17. The variance inflation factor scores for the key independent variables range from 1.10 to 2.62, far from the threshold value of 10.00, thus indicating that multicollinearity is not a problem for the key variables.


18. Allison and Waterman (2002) recommend this model over the negative binomial fixed effects estimator in Table 2 (Hausman, Hall, & Griliches, 1984). But with the large number of countries in the sample, the unconditional negative binomial fixed effects model suffers the incidental parameter bias.

19. For robustness check, I estimated the models in Table 2 excluding the lagged dependent variable. The results (not reported) remain consistent with those in Table 2.

20. I also estimated the models in Table 2 controlling for the number of bilateral invest-ment treaties signed by a country. The effects of the political variables remain robust. The effect of the bilateral investment treaties variable is insignificant, which is not surprising given that such treaties became popular only in the 1990s.

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Quan Li is a professor in the Department of Political Science at the Texas A&M University. His research focuses on the causes and consequences of economic globalization, political violence, and democratic governance. His work has appeared in the British Journal of Political Science, Comparative Political Studies, International Organization, International Studies Quarterly, Journal of Conflict Resolution, Journal of Politics, Journal of Peace Research, Political Research Quarterly, among others.

Documents

Comparative Political Studies Volume 42 Number 8 © 2009 ...people.tamu.edu/~quanli/papers/CPS-2009-expropriation.pdf · a news conference in La Paz on December 20, 2005, 2 days after