Collections > Electronic Theses and Dissertations > Cronies, Capitalists, and Control: Foreign Direct Investment Regulation, International Capital Flows, and Banking Sector Reforms

This dissertation argues policies toward foreign direct investment (FDI) are best understood as the product of domestic political coalitions led by local business elites that are conditioned on the local financing environment. Local firms support restrictive FDI policies when financial repression and loose global credit markets provide powerful industrial elites with access to ample credit on subsidized terms. When the domestic banking sector undergoes substantial reforms, local elites no longer have access to cheap credit through political connections. The need to obtain finance outweighs firms' preferences to exclude foreign direct investors. Under such conditions, industrial elites will pressure governments to pursue liberal FDI policy environments. Using a mixture of quantitative and qualitative research methods, I find substantial support for this theory. Banking sector reforms are associated with considerable decreases in foreign equity restrictions, even after controlling for a variety of alternative explanations of FDI policy liberalization. Financial reforms are also positively associated with moving from closed to partially open FDI policy states and with preventing policy backsliding once the investment climate fully liberalizes. Availability of alternative investment sources reduces the propensity to fully liberalize FDI policies. A comparative case study of investment policy maintenance and reform in Indonesia and Malaysia from 1965 to 2013 shows industrial elites in both countries were influential to the policymaking process and that these elites advocated restrictive policies under financial repression and openness after banking system reforms. These findings suggest elite interests, rather than the ways domestic political institutions mediate the interests of capital and labor, drive FDI policymaking and underscore how financial access influences firms' interests.