Foreign Direct Investment Liberalization in Communist Regimes: A Theoretical Model Based on the Comparison Among China, Cuba, North Korea, and Vietnam
| Author | Alexander Kriebitz,Raphael Max |
| Published date | 01 August 2022 |
| Date | 01 August 2022 |
| DOI | http://doi.org/10.1177/14789299211020911 |
| Subject Matter | Articles |
https://doi.org/10.1177/14789299211020911
Political Studies Review
2022, Vol. 20(3) 456 –474
© The Author(s) 2021
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DOI: 10.1177/14789299211020911
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Foreign Direct Investment
Liberalization in Communist
Regimes: A Theoretical Model
Based on the Comparison
Among China, Cuba, North
Korea, and Vietnam
Alexander Kriebitz and Raphael Max
Abstract
What are the driving factors for foreign direct investment liberalization in formerly communist
countries? Previous research explains foreign direct investment liberalization as a function of
the intensification of international commerce and democratization; however, the likes of China,
Cuba, North Korea, and Vietnam hardly fit into this narrative. The following contribution makes
a theoretical argument about the causes of foreign direct investment liberalization in communist
authoritarian regimes with highly centralized and closed economies. We argue that foreign direct
investment liberalization is caused by external shocks materializing in policy adaptations. The
degree of foreign direct investment liberalization depends on the balance of power between
actors who favor liberalization and actors who stand to profit from rent-seeking economies. The
relative power of both factions determines the magnitude and type of foreign direct investment
liberalization. We test this theoretical argument using case studies, which include China and
Vietnam as representatives of gradual transitions and Cuba and North Korea as representatives
of traditional rent-seeking economies.
Keywords
Communist regimes, economic liberalization, economic reform, FDI
Accepted: 9 May 2021
Introduction
The recent wave of globalization, which began in the 1980s and continued until the finan-
cial crisis of 2007, was largely driven by the economic integration of developing
TUM School of Governance, Technical University of Munich, Munich, Germany
Corresponding author:
Alexander Kriebitz, TUM School of Governance, Technical University of Munich, Arcisstrasse 21, Munich
80331, Germany.
Email: a.kriebitz@tum.de
1020911PSW0010.1177/14789299211020911Political Studies ReviewKriebitz and Max
research-article2021
Article
Kriebitz and Max 457
countries into the global economy, among them many former centralized economies, such
as China and Vietnam. In 2017, the Chinese economy accounted for 30% of global eco-
nomic growth, dwarfing the contribution of Western countries to the growth of the world’s
economy (International Monetary Fund, 2018). Foreign direct investment (FDI) liberali-
zation and joint ventures with foreign companies played a crucial role in this context, as
they contributed significantly to the Chinese and Vietnamese economic miracles (cf.
Chen et al., 1995; Hoang et al., 2010).
However, the introduction of property rights into centralized economies and the sub-
sequent decentralization of economic and political decisions (Acemoglu and Robinson,
2012; Coase, 1960) entails high risks for authoritarian leaders (Treisman, 1999). As a
result, we have only limited knowledge as to why and how some countries were able to
implement policies conducive to a full-fledged transformation while others, such as North
Korea and Cuba, remained stuck in heavily centralized economic systems. To gain more
insight into the matter, we develop a theoretical argument derived from previous literature
on FDI and capital flow liberalization to explain why and how formerly communist coun-
tries liberalized their legal frameworks regarding FDI. Although literature has already
covered major aspects of FDI liberalization (e.g. Acemoglu and Robinson, 2012; North
et al., 2009; Pandya, 2013; Pepinsky, 2008, 2009, 2013; Quinn and Inclan, 1997), we
argue that these approaches need to be tailored to the power constellations prevailing in
centralized economies and the dimension of foreign affairs. To validate our argument, we
examine case studies based on the historical cases of China, Cuba, North Korea, and
Vietnam, as the comparison of the countries within this group tells much about the insti-
tutional preconditions and constraints of FDI liberalization. Furthermore, we find that
socioeconomic shocks determine the timing of FDI liberalization, whereas the constella-
tion of a domestic coalition dictates the pace and depth of socioeconomic reforms. Both
aspects relate to each other, as shocks might not only necessitate the adaption of liberali-
zation policies but can also alter the preferences and constellation within the supporting
coalition of the regime.
Literature Review
Previous theoretical work and empirical studies on FDI liberalization and capital open-
ness (cf. Chwieroth, 2010; Eichengreen and Leblang, 2008; Pandya, 2013; Quinn and
Inclan, 1997; Vadlamannati and Cooray, 2014) concentrated on democratization, spillo-
ver effects, and domestic power constellations as drivers of economic liberalization.
According to quantitative research (Pandya, 2013; Quinn, 2003), FDI liberalization and
financial openness seem to be tied to democratization, reflecting the viewpoint that the
enhancement of political liberties goes along with improvements of economic rights (cf.
Eichengreen and Leblang, 2008). In addition, the process of FDI liberalization seems to
be driven by competition among nations to attract foreign companies, as FDI liberaliza-
tion in one country seems to increase the likelihood of regulatory changes in the immedi-
ate neighborhood (cf. Oman, 1999; Vadlamannati and Cooray, 2014). According Quinn
and Inclan (1997), the groups supporting ruling political parties, such as organized labor
or owners of capital, determine the degree of participation in globalization. Pinto (2004)
draws similar conclusions, attributing the variance of FDI liberalization to the business-
or labor-friendliness of the government. However, what about FDI liberalization in dicta-
torships? The narrower size of the support group notwithstanding (Bueno de Mesquita,
2003), the connection between policy design and the interest of domestic interest groups
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