Electoral Uncertainty, Political Constraints, and Political Capabilities in Cross-Border Investment

Jakob Müllner, Jonas Puck, Martin Fraißler, Sinziana Dorobantu

Publication: Scientific journalJournal articlepeer-review

Abstract

In this paper we explore an under-researched dimension of political risk: electoral uncertainty. Using 56,996 M&A and greenfield investments into 55 countries, we show that close upcoming elections reduce the likelihood of foreign investments. Based on political cycle theory, we hypothesize and show empirically that countries with lower political constraints allow incumbent governments to offer sweet deals to foreign investors for their political benefit, thus moderating the negative effect of close upcoming elections. Finally, we argue and show that firms with previous experience in pre-election bargaining are more likely to invest under electoral uncertainty. Our paper offers several contributions combining the literatures on electoral uncertainty, political risk and political capabilities. Most importantly, our research adds an important and controversial contingency to the widely accepted dogma that low political constraints impede foreign direct investment.
Original languageEnglish
JournalAcademy of Management Proceedings
VolumeAug
DOIs
Publication statusPublished - 2019

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