How does foreign direct investment (FDI) affect rule of law in developing countries? While we know that multinational corporations (MNCs) invest tens of billions of dollars into countries with relatively weak rule of law, less is known about how foreign firms protect their valuable assets against expropriation in these contexts. International relations scholars typically assume foreign firms bypass domestic institutions and rely on international institutions for property protection when they enter countries with relatively weak institutions. This book challenges this conventional understanding and advances the novel position that domestic institutions are indispensable for protecting foreign firms’ property rights. It argues that MNCs employ political strategies that influence and shape rule of law in developing countries, with varying degrees of success. 

Private firms are increasingly becoming global political actors, yet few studies have systematically investigated how they coordinate and influence policy around the world. While prior work has focused on lobbying in developed countries (especially the United States) and more recently on foreign lobbying in the United States, there have been very few systematic studies of how MNCs take their preferences to various markets around the world and translate them into local laws and practices. The politics of FDI literature has therefore largely overlooked the channels through which foreign investors directly shape governance in host countries. To address these gaps in the literature, this book focuses on MNCs’ use of domestic institutions in host countries to bargain with host governments for better property rights protection.

It argues that MNCs pursue a “two-level bargaining” strategy that leverages home government strengths and host government channels to drive institutional change in host countries. At the state-to-state level, home governments, motivated by MNC demands, negotiate with host states for strengthened property protection. At the firm-to-state level, MNCs use political strategies (e.g lobbying, corporate social responsibility, other political investments) to engage directly with the host state to seek better property protection. Pharmaceutical conglomerates like Pfizer, for example, both lobby the US government for better property protection overseas and negotiate with host governments. These strategies influence domestic laws and institutions in MNCs’ host countries. Yet, host governments strategically choose which demands to accept from MNCs; they take advantage of ambiguity in written laws to obfuscate their implementation. Thus, FDI contributes to the rule of law in host countries, but to varying degrees between de jure and de facto institutions. State-to-state bargaining is more likely to produce institutional change at the de jure level, whereas firm-to-host state strategies are more likely to change enforcement levels on the ground. 

Empirically, the book focuses on the protection of intangible assets (eg. patents, software), which represent the highest value-added activities in global supply chain and production networks. Competition over technology and intangible assets also has the potential to spark state-level conflicts such as the US--China trade war. It uses a wide range of cross-country and within-country evidence to test the theory and its observable implications. Cross-country data on FDI flows, survey experiments with business managers, text analysis of public comments from business groups, as well as industry- and firm-level observational data collected for this study, demonstrate strong support for the arguments. 67 field interviews with practitioners and government officials in China, Vietnam, the United States, and Europe corroborate the arguments.

Manuscript available upon request

University-wide winner, 2020 GAPSA-Provost Fellowship Award for Interdisciplinary Innovation

The Teece Award for empirical interdisciplinary dissertation research, UPenn