Political Economy of Foreign Direct Investment

Foreign direct investment (FDI) represents a critical channel through which multinational enterprises allocate capital across borders, seeking ownership stakes and managerial control in foreign affiliates. The political economy of FDI examines how domestic institutions, international agreements and geopolitical considerations shape these cross-border flows. Host-country policies – including investment protection provisions, tax incentives and regulatory frameworks – interact with political risk factors such as expropriation threat, governance quality and bureaucratic discretion to influence investor decisions. Equally, home countries deploy diplomatic leverage, development aid and treaty networks to secure market access and legal guarantees for outward investors. The balance between state sovereignty over economic policy and the desire to attract foreign capital lies at the heart of this field, as policymakers must weigh the benefits of technology transfer and job creation against potential constraints on regulatory autonomy and distributional impacts. Global shifts in strategic competition, growing scrutiny of critical infrastructure and rising concerns about economic security have further intensified scholarly attention to how geopolitical rivalries, dispute-settlement mechanisms and domestic political coalitions drive the geography and sectoral composition of FDI.

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Political Economy of Foreign Direct Investment publication trend

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Technical terms

Foreign Direct Investment (FDI): A long‐term capital flow in which an investor acquires lasting interest and control in a foreign enterprise, typically defined by ownership of at least 10 per cent of voting rights.

Bilateral Investment Treaty (BIT): A reciprocal agreement between two states that secures legal protections, such as fair-and-equitable treatment and compensation for expropriation, to encourage cross-border investment.

Political Risk: The probability that political decisions, events or conditions in a host country will adversely affect the profitability or sustainability of foreign investments.

Investor-State Dispute Settlement (ISDS): A mechanism in international agreements allowing investors to pursue claims directly against host governments before arbitration tribunals when alleged treaty violations occur.

Investor Protection: The suite of legal provisions and institutional safeguards—embodied in treaties, domestic laws or arbitration clauses—designed to minimise the risk of unlawful expropriation and ensure due process for foreign investors.

References

1. The impact of unilateral BIT terminations on FDI: Quasi-experimental evidence from India. The Review of International Organizations (2022).
2. Be my guest: the effect of foreign policy visits to the USA on FDI. Review of World Economics (2023).
3. DOES INVESTOR PROTECTION INCREASE FOREIGN DIRECT INVESTMENT? A META‐ANALYSIS. Journal of Economic Surveys (2020).