This is from a new paper by Emma Aisbett and Lauge Poulsen, called "Relative Treatment of Aliens: Firm-level Evidence from Developing Countries":
Foreign firms are subject to a wide range of political risks when operating in developing countries that lack strong property rights institutions. Important insights about the nature and extent of these risks is coming out of burgeoning literatures in political science, international economics, and international business. Yet, it is not just foreign firms that suffer in countries with weak property rights. Expropriation, breach of contract, opaque and unpredictable government behaviour – all are familiar concerns not just for foreign investors but also domestic firms operating in high-risk jurisdictions. It is therefore unfortunate that academic literature and policy debates routinely focus solely on the absolute treatment of foreign investors and rarely consider treatment of comparable domestic investors.
Our results suggest that foreign firms tend to be treated at least as well by host state governments as comparable domestic firms in the vast majority of cases. There is a political advantage, as opposed to liability, of being a foreign firm. As a matter of descriptive inference, this not only questions a widely used assumption in much literature on foreign investment governance, but also provides important context to on-going policy debates about the appropriateness of governments giving foreign investors unique rights and privileges unavailable to domestic firms – for instance in investment treaties.
Secondly, our results show that the political advantage of foreignness are greatest in the poorest countries of the world. One set of explanations for this finding could be that least developed countries are likely to perceive the greatest benefits from foreign investment, because they are in desperate need of investment of any kind, and that they have fewer ‘locational advantages’ when bargaining with multinationals. Another set of explanations could arise from political and institutional dynamics. For instance, the poorer a country, the more exposed it is to pressure by foreign governments and international organizations demanding special attention to the needs of multinationals. Skill gaps may also be particularly pronounced when low-income countries bargain with foreign firms. In addition, domestic lobby strength is a function of domestic firm and industry size, which again points to poorer countries being more likely to favour foreign firms given their smaller domestic industrial base. We leave it to future studies to study these, and other, mechanisms in more detail.
Finally, our findings highlight the importance of distinguishing between relative and absolute treatment of foreign firms. While low-income countries tend to treat foreign firms considerably better than comparable domestic firms, they still treat foreign firms worse than middle-income countries in an absolute sense. This means that the findings of the large and growing literature on the cross-country causes and consequences of the absolute treatment of foreign firms cannot necessarily be transferred to the question of relative treatment.
