Crisis and contract breach: The domestic and international determinants of expropriation
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Crisis and contract breach: The domestic and international determinants of expropriation Nathan M. Jensen1 · Noel P. Johnston2 · Chia-yi Lee3
· Hadi Sahin4
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract In this paper we address how external factors shape government decisions to break or uphold contracts, specifically focusing on how economic shocks and support from multilateral financial institutions shape leader decisions to expropriate from investors. Contrary to conventional wisdom and much of the existing scholarship, we argue that governments are less likely to expropriate from investors during periods of economic crisis since governments become more sensitive to the reputational costs of expropriating. We also argue that governments are sensitive to the levers other governments may use to punish for expropriation, such as withholding IMF and World Bank funding. We test these theories using a dataset of investment expropriations and case studies of thirty-four investment disputes that were resolved pre-claim. Our econometric analysis suggests that expropriations of foreign investment are less common during periods of crisis, and that countries under IMF agreements or borrowing from the World Bank are less likely to expropriate. Our thirty-four case studies, which substantiate the role of government reputation and multilateral pressure, support our statistical results. Keywords Expropriations · Economic crisis · Multilateral financial institutions · Reputational costs · Retaliation costs JEL Classification F53 · F69 · H13
Political science scholarship examining the political economy of foreign direct investment (FDI) has focused on how the political risks facing multinational enterprises affect investment location choice. Multinational enterprises operating in foreign Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11558-019-09363-z) contains supplementary material, which is available to authorized users. Nathan M. Jensen
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Extended author information available on the last page of the article.
N. M. Jensen et al.
markets are exposed to many potential risks, ranging from outbursts of political violence, government restrictions on the repatriation of capital, and regulatory uncertainty.1 While relatively rare, government choices to expropriate assets from investors or breach contracts with firms are often the most important risks for firms operating abroad (MIGA 2012). Firms either avoid countries with propensities to expropriate or are forced to engage in costly activities to insure their investments or limit the ability or incentive of governments to renege on contracts post-investment.2 Political science research has focused on how cross-national factors, such as the level of democracy, quality of courts, or international agreements, affect political risks for multinational enterprises and flows of FDI.3 In the next section we briefly review this literature, but our main point is that despite thi
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