The research analyzes the effect of regime type on the choice of policies regulating the entry and operation of foreign companies. Despite wide consensus that foreign direct investment (FDI) contributes to economic development, foreign investment regulations in developing countries range from open to very restrictive. Some countries welcome foreign firms with straightforward regulations and generous investment incentives. By contrast, other governments keep in place regulatory barriers and cumbersome requirements that deter the entry of foreign companies. This research investigates these policy differences. It draws upon economic insights into the distributional consequences of FDI and a theory of political coalitions in differ political regimes to argue that democratic countries are more likely to adopt policies that foster foreign investment than non-democratic regimes. The theoretical rationale is relatively straightforward: dictatorships, which have small winning coalitions, use government policies to cater to the interests of those controlling enough instruments of power to keep the leader in office. These are members of the business elite, the army, or the party leadership in one-party systems, and are likely to be part of the wealthier group in society. By contrast, democratic regimes, which must maintain the support of large winning coalitions, choose policies that benefit the majority of the population?owners of labor. Since FDI inflows benefit the owners of factors of production that complement foreign capital and hurt the owners of factors of production for which FDI is a substitute. This theoretical framework and a formal model make specific predictions about the effect of regime type on each of the three different dimensions of FDI regulation?the regulation of foreign entry, taxation, and incentive programs?and on variation among sectoral policies. This research tests these hypotheses on the basis of statistical analysis using an original dataset on postcommunist nations and the in-depth examination of two theoretically important cases, Croatia and Belarus. The research contributes to four bodies of literature in political science, as well as to the very limited pool of quantitative data on national policies regulating FDI. It involves an intensive effort to collect and code information on FDI restrictions, taxation, and incentives for 28 postcommunist countries between 1990-2005. This dataset is the first to code incentives for FDI, as well as the first to combine information on FDI restrictions, taxation, and incentives. The dataset will be instrumental for future research investigating determinants of policy choice and the effect of government regulations on economic outcomes. At the theoretical level, the project has implications for four strands of research. First, it advances the debate over the nexus between regime type and economic growth by emphasizing policy choice as a mediating variable between political institutions and economic performance. Second, the research challenges many conclusions in the literature on economic reform, which suggest that reform is promoted by authoritarian regimes capable of overriding the opposition of concentrated interests that stand to lose from policy change. In contrast, this project advances the proposition that democracies have an inherent bias toward adopting policies that benefit large and diffuse groups in society despite the organized opposition of special interests. Third, the project advances research on the political economy of postcommunist transformations by emphasizing the political sources of policy differences among transition countries. Fourth, the project contributes to the emerging literature on regime type and FDI by advancing a series of hypotheses about the impact of political institutions on policy choice and exploring those hypotheses on the basis of an original dataset of FDI regulations. Finally, the study will also interest policy-makers who shape countries'' policy framework regulating the entry and operations of foreign firms. The FDI regulations dataset will contain a wide range of detailed information that allows for an evaluation of strategic policy choices and best practices in this policy domain.
