Variations in Foreign Direct Investment in Authoritarian Regimes

Scholars have shown how foreign investors prefer low risk environments. Foreign investors want strong property rights and policies that protect their assets. Furthermore, it has been shown that democracies have stronger property rights protections and less political risks than nondemocracies. However, what is unusual is that some nondemocratic countries are drawing greater inflows of foreign direct investment (FDI). Some nondemocratic regimes have attracted tremendous levels of foreign investment, while others have not: there exists great variation in FDI inflows among the nondemocracies. So, how do some authoritarian regimes establish credibility to foreign investors? What explains the variation in foreign direct investment among nondemocracies? The findings suggest that nondemocratic nations signal credibility through international institutions. Specifically, the presence of a bilateral investment treaty (BIT) is attractive to foreign investors investing in risky environments. The BIT creates a contractual framework for investment and provides an international audience. As a result, BITs reduce political risk by constraining the dictator.