Federal Institutions and Multinational Investors: Federalism, Government Credibility, and Foreign Direct Investment

While the investment potential might be lucrative, there is always the risk that the host government will expropriate the profits and assets of the foreign investor. Political institutions, however, can serve as constraints on the actions of political actors in the host country.

We argue that federal structures lower political risk. Joint-reputational accountability in overlapping political jurisdictions increases the likelihood that investment contracts will be honored. Empirical analyses of cross-sectional time-series data for 115 countries, from 1975-1995, are used to study how political institutions affect foreign direct investment (FDI) flows.