Monopoly Rents and Foreign Direct Investment in Fixed Assets

Abstract

In the past two decades, much of foreign direct investment in the primary sector has flowed to unconventional, politically risky destinations. This presents a puzzle for theories that emphasize the ex post immobility of --- and hence high potential expropriation risk for --- fixed asset investment. Existing theories overlook one critical aspect of fixed assets: large capital requirements and high sunk costs act as entry barriers, resulting in market concentration and strong firm incentive for monopoly rent extraction. Personalist dictatorships, we posit, provide an attractive institutional environment for fixed asset investors because the lack of institutional constraints and leaders' families' control of key economic sectors facilitate rent-seeking activities. We find that personalist dictatorships have significantly more foreign investment in the primary sector, and fixed-asset intensive industries in general, than other regimes. This study highlights the importance of accounting for heterogeneity among investors and political regimes to understand the politics of FDI.

Keywords: Foreign Direct Investment, Multinational Corporations, Fixed Assets, Monopoly Rents, Authoritarian Regimes