The type of government and the interplay of macro- and microlevel political institutions affect a country’s ability to attract foreign investment
Yu Zheng challenges the idea that democracy is the prerequisite for developing countries to attract foreign direct investment (FDI) and promote economic growth. He examines the relationship between political institutions and FDI through the use of cross-national analysis and case studies of three rapidly growing Asian economies with a focus on the role of microinstitutional “special economic zones” (SEZ).
China’s authoritarian system allows for bold, radical economic reform, but China has attracted FDI largely because of its increasingly credible investment environment as well as its central and local governments’ efforts to overcome constraints on investment. India’s democratic institutions provide more political assurance to foreign investors, but its market became conducive to FDI only when the government adopted more flexible investment policies. Taiwan’s democratic transition shifted its balance of policy credibility and flexibility, which was essential for the nation’s economic takeoff and sustained growth.
Zheng concludes that a more accurate understanding of the relationship between political institutions and FDI comes from careful analysis of institutional arrangements that entail a trade-off between credibility and flexibility of governance.
“[Zheng] adds significantly to our knowledge of FDI as well as insights into how governments act to overcome their institutional obstacles in order to attract investment. The original data on China is innovative and very well-presented.”
—Robert Blanton, University of Memphis
“Zheng marshals an impressive array of qualitative and quantitative evidence in support of his provocative, yet nuanced, argument that authoritarian regimes are better at creating new institutions that attract foreign direct investment. The book outlines an important competing hypothesis to explain China’s economic miracle.”
—Victor Shih, School of International Relations and Pacific Studies, University of California at San Diego