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Sources of change in Third World regimes for foreign direct investment, 1968–1976

Published online by Cambridge University Press:  22 May 2009

David A. Jodice
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Many developing countries have become increasingly activist toward multinational corporations in recent years. A number of governments have significantly altered the national regime for foreign direct investment (FDI) in order to shift ownership and control toward the host country. The national regime for FDI is the set of rules, regulations, and behavioral norms under which foreign enterprises are expected to operate. Foreign investment regime change can occur in a number of ways (formal expropriation, cancellation of contracts or concessions, alteration of taxation and royalty formulae, limitations on profit repatriation, requirements of local equity participation, etc.) that affect the operational autonomy and financial returns of the foreign firm. This paper will present a theory to explain one aspect of foreign investment regime change: the formal nationalization or expropriation of foreign-owned subsidiaries operating in natural resource extraction.

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Articles
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International Organization , Volume 34 , Issue 2 , Spring 1980 , pp. 177 - 206
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Copyright © The IO Foundation 1980

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References

1 For a more extensive discussion of the firm-specific factors that affect political risk, see Kobrin, Stephen J., “Foreign enterprise and forced divestment in the LDCs,” International Organization 34 (Winter 1980)CrossRefGoogle Scholar.

2 There are many excellent case studies of expropriation in the developing countries. Among them are: Argento, Gerrit H., The Social, Political and Economic Impact of a Leading Enclave Export Industry: Bauxite and Jamaica (Johns Hopkins University, Ph.D. dissertation, 1974)Google Scholar; Baklanoff, Eric N., Expropriation of U.S. Investments in Cuba, Mexico and Chile (New York: Praeger, 1975)Google Scholar; Einhorn, Jessica Pernitz, Expropriation Politics (Lexington: D.C. Heath, 1974)Google Scholar; Girvan, Norman, Corporate Imperialism, Conflict and Expropriation: Multinational Corporations and Economic Nationalism in the Third World (White Plains, N.Y.: M.E. Sharpe, 1976)Google Scholar; Goodsell, Charles T., American Corporations and Peruvian Politics (Cambridge: Harvard University Press, 1974)CrossRefGoogle Scholar; Gordon, Michael W., The Cuban Nationalizations: The Demise of Private Foreign Property (Buffalo, N.Y.: William S. Hein and Company, 1976)Google Scholar; Ingram, George M., Expropriation of U.S. Property in South America: Nationalization of Oil and Copper Companies in Peru, Bolivia and Chile (New York: Praeger, 1974)Google Scholar; Knudsen, Harald, Expropriation of Foreign Private Investments in Latin America (Bergen: Universitetsforlaget, 1974)Google Scholar; Litvak, Isaiah A. and Maule, Christopher J., eds., Foreign Investment: The Experience of Host Countries (New York: Praeger, 1970)Google Scholar; Mikesell, Raymond F., ed., Foreign Investment in the Mineral and Petroleum Industries: Case Studies of Investor-Host Country Relations (Baltimore and London: Johns Hopkins University Press, 1971)Google Scholar; Moran, Theodore H., Multinational Corporations and the Politics of Dependence: Copper in Chile (Princeton: Princeton University Press, 1974)Google Scholar; Petras, James F., Morely, Morris, and Smith, Steven, The Nationalization of Venezuelan Oil (New York: Praeger, 1977)Google Scholar; Pinelo, Adalberto J., The Multinational Corporation as a Force in Latin American Politics: A Case Study of the International Petroleum Company in Peru (New York: Praeger, 1973)Google Scholar; Smith, David N. and Wells, Louis T. Jr, Negotiating Third World Mineral Agreements: Promises as Prologue (Cambridge, Mass.: Ballinger, 1976)Google Scholar; Truitt, J. Frederick, Expropriation of Private Foreign Investment (Bloomington: University of Indiana Press, 1974)Google Scholar; Tugwell, Franklin, The Politics of Oil in Venezuela (Stanford: Stanford University Press, 1975)Google Scholar; United States, Department of Commerce, Office of Business Economics, International Investment Division, U.S. Direct Investment Abroad, 1966 (Washington, D.C.: U.S. Government Printing Office, 1971)Google Scholar; United States, Department of State, “Nationalization Expropriation, and Other Takings of U.S. and Certain Foreign Property Since 1960” (Washington, D.C.: Bureau of Intelligence and Research, 1971)Google Scholar; Vernon, Raymond, Storm over the Multinationals (Cambridge: Harvard University Press, 1977)Google Scholar; Zink, Dolph Warren, The Political Risks for Multinational Enterprises in Developing Countries (New York: Praeger, 1973)Google Scholar.

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7 This cross-time pattern of expropriation events holds even when we control for region and economic sector.

8 The present ranking of FDI vulnerability by sector is roughly similar to that in Kobrin's paper (see fn. 1 above). Table 1 is rank-ordered by the value of the vulnerability coefficient. These are the ratios of share of takings to share of FDI by sector. The calculation of a similar coefficient from Kobrin's Table 2 results in the following order: mining and smelting, petroleum, agriculture, public utilities, banking, trade, manufacturing and other. These two rank-orderings differ in the relative importance of petroleum, the residual category and banking and insurance. These differences are largely explained by the use in this paper of OECD data on all petroleum sectors (production, refining, and distribution) as the denominator in that sectoral ratio, and the inclusion of communications and transportation under other than public utilities, and the provision of sectoral data for 508 rather than 494 acts, as was the case in Kobrin's paper.

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10 Ninety-four percent of all petroleum subsidiaries expropriated were more than 85 percent foreign-owned. This contrasts with the figure of 60 percent for firms from all sectors.

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14 These data are presented in U.S. Department of Commerce, U.S. Direct Investment Abroad, 1966. Part II: Investment Position, Financial and Operating Data (Washington, D.C.: U.S. Government Printing Office, 1971)Google Scholar.

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23 After considerable effort, Bruce Russett, et al. were able to obtain general and central government employment data for eighteen and twenty-one countries respectively. World Handbook of Political and Social Indicators (NewHaven: Yale University Press, 1964), pp. 70–71Google Scholar. The situation with respect to data on public sector employment has not improved much in the meantime.

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26 This section draws heavily on Olson, Richard Stuart, “Economic Coercion in International Disputes: The United States and Peru in the IPC Expropriation Dispute of 1968–1971,” Journal of the Developing Areas 9 (04 1975): 395–414Google Scholar.

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34 For instance, Kindleberger, Charles P. argues the political utility of expropriation in “The Multinational Corporation in a World of Militant Developing Countries,” pp. 79–80Google Scholar in Global Companies: The Political Economy of World Business, Ball, George W., ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1975)Google Scholar.

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37 See Huntington, Samuel P., “Transnational Organizations in World Politics,” World Politics 25 (04 1973): 333–68CrossRefGoogle Scholar.

38 Bostock, Mark and Harvey, Charles, eds., Economic Independence and Zambian Copper: A Case Study of Foreign Investment (New York: Praeger, 1973)Google Scholar.

39 See Hibbs, Douglas A., Mass Political Violence: A Cross-National Causal Analysis (New York: Wiley, 1973)Google Scholar.

40 Ibid., p. 9.

41 Ibid., pp. 12–13.

42 Why Men Rebel, p. 239.

43 Duvall, Raymond and Shamir, Michal, “The Coercive State: Cross-National, Time-Series Indicators,” in Indicator Systems for Political, Economic and Social Analysis, Taylor, Charles Lewis, ed. (forthcoming, 1980)Google Scholar.

44 For a further analysis of these issues see Olson, Richard Stuart, “Economic Coercion in World Politics: With a Focus on North-South Relations,” World Politics 31 (07 1979): 471–94CrossRefGoogle Scholar; and Lipson, Charles H., “Corporate Preferences and Public Policies: Foreign Aid Sanctions and Investment Protection,” World Politics 28 (04 1976): 396–421CrossRefGoogle Scholar.

45 This point was argued by Truitt, J. Frederick, Expropriation of Private Foreign Investment (Bloomington: University of Indiana, 1974)Google Scholar.