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The Department of Government

Wellhausen: The Politics of Foreign Investment

Tue, February 7, 2017
Wellhausen: The Politics of Foreign Investment
Rachel Wellhausen led an original survey of U.S. corporations operating in Russia

Rachel Wellhausen’s article (with Leslie Johns, UCLA), “Under One Roof: Supply Chains and the Protection of Foreign Investment,” appears in the February 2016 issue of American Political Science Review, the discipline’s flagship journal.

The article analyzes the risk multinational corporations (MNCs) face when investing in countries lacking strong property rights. Noting that some firms are more vulnerable to predatory governments than others, the article explains variation in the likelihood that a foreign firm will have its property rights honored.

Certain mechanisms enforcing MNC property rights in foreign countries are known, such as market pressure on a host government interested in attracting investment. Wellhausen and Johns add an additional mechanism to the mix – economic links, and specifically, supply chains.

When a foreign firm has local firms within its supply chain, those firms face costs should the foreign firm’s property rights be violated. This creates a disincentive for a host government to violate the property rights of firms anywhere in the supply chain. Firms in the supply chain may actively push back against government interference, through political contributions, participation in corporate social responsibility programs, or bribes. Firms in the supply chain can also indirectly generate costs for the host government by reducing their investments in response to government interference.

Wellhausen and Johns offer a formal model laying out their theoretical expectations, and their empirical evidence includes statistical analysis of a cross-national dataset on international investment arbitration, an original survey of American MNCs with operations in Russia, and interviews with executives at foreign firms operating in Azerbaijan.

Interestingly, whereas MNCs have frequently been easy targets for critics of globalization, this article demonstrates that by doing business with MNCs, local firms gain protection from adverse treatment by their own government, which can help local development.

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