The Politics of Investment Partisanship and the Sectoral Allocation of Foreign Direct Investment ∗ Pablo M. Pinto † and Santiago M. Pinto ‡ May 4, 2006 Abstract This paper analyzes how foreign direct investment (FDI) reacts to changing political conditions in host countries. More specifically, we explore the existence of partisan cycles in FDI investment performance. We develop a model that predicts that the incumbent government’s partisanship -i.e.: its allegiance to labor or capital- should affect foreign investors’ decision to flow into different sectors. Next, we analyze the pattern of direct investment to OECD countries disaggregated by sector from roughly 1985 through 2000. We find evidence of the existence of such partisan cycles in the patterns of direct investment performance across countries and over time at the industry level. In particular, we observe that in countries that are governed by parties of the left, FDI tends to flow into industries associated with the production of food, textiles, machinery, and vehicles, financial intermediation, mining and quarrying, and utilities, and out of sectors such as construction and transportation. We also find preliminary evidence of a positive correlation between foreign investment and economy wide change in wages under left-leaning incumbents, which is consistent with the assumptions around which our model is built. Our tentative conclusion is that foreign investors do seem to respond to partisan cycles: when parties of opposite ideologies alternate in power, FDI flows into those sectors where foreign capital is a complement of the factor of production owned by the core constituent of the incumbent party, and out of those sectors where it substitutes for the factor owned by that constituent. JEL Classification: F21, F23, D72, D78 Keywords: foreign direct investment, partisan governments * The authors are grateful to William Bernhard, Lawrence Broz, Christina Davis, Erik Gartzke, Lucy Goodhart, Peter Gourevitch, Michael Hiscox, Quan Li, Bumba Mukherjee and participants in the faculty seminar at Columbia University for comments on earlier versions of this paper, and to Ryan Griffiths for research assistance. Research for this project was funded in part by a summer faculty research grant awarded by the Center for International Business Education and Research (CIBER) at Columbia University. Earlier versions of this paper were presented at the 2005 meeting of the American Political Science Association, the 2006 meeting of the International Studies Association, and the 2006 meeting of the Midwest Political Science Association. † Department of Political Science, Columbia University. Address: 420 West 118th Street, 1331 IAB, MC 3347, New York, NY 10027; phone: 212-854-3351; e-mail: pp2162@columbia.edu ‡ College of Business and Economics, West Virginia University. E-mail: smpinto@mail.wvu.edu 1