FDI Regulatory Reform and Political Beliefs: A Political Economy Approach

Abstract

This paper analyzes the setting of a reform towards liberalization of FDI policies as a political compromise pressured by the lobbying of a domestic lobby and a foreign MNC lobby. Using a common agency model of lobbying, we show that, under specific conditions, the interest group’s influence is not distortive for a critical distribution of supporters over non-supporters of the reform. Also, our political economy framework shows that exogenous provision of information on the beneficial effects of FDI liberalization paradoxically weakens the reform process.