How Do Long-Term Project Investors "Vote" in Developing Country Elections?

• Main Authors: Vaaler, Paul M., Schrage, Burkhard N.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2006
• Subjects: Investments; decision making; emerging markets; investment analysis; Corporate Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/1070; https://doi.org/10.5465/AMBPP.2006.27166788
• Institution: Singapore Management University

Investment decision-making in developing countries has largely ignored the role that local electoral politics may play in either encouraging or discouraging long-term investment projects sponsored by foreign firms. Increase in developing country foreign direct investment on the one hand, and trends promoting democratization and competitive elections on the other hand provide an ideal research opportunity to investigate possible investment-election linkages. We do so through development and testing of a framework integrating partisan and opportunistic political business cycle ("PBC") theories to predict trends in the count of major investment projects announced in 18 emerging-market countries holding 31 presidential elections from 1987-2000. Consistent with the framework, we find that firms sponsoring major project investments perceive lower investment risk in the form of more investment project announcements as left-wing political incumbents appear more likely to be replaced by right-wing challengers. Similarly, we find that announced project counts are lower for right-wing incumbents in "close-call" elections with left-wing challengers or in elections where left-wing challengers are likely to oust the right-wing. These negative "right-wing" effects on investment project counts even persist into the year after the election. Overall, our results suggest that firms sponsoring major investment projects also "vote" in developing-country elections by significantly and substantially varying the number and dollar amount of announced investment projects important to developing country economic growth. For international business research, these findings demonstrate the value of using PBC theoretical lenses to understand links between short-term electoral politics and long-term investment risk and decision-making in developing countries.