Introduction to Empirical Section

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As do economic variables, political variables such as political institutions and economic policies have an important effect on capital inflows per capita. Capitalist policies and democratic political institutions tend to attract investment, particularly FDI.

Investor response to economic strategy and political regime type depends on the economy’s dependence on natural resources, however. Since mineral and oil extraction are the major profit opportunities in Africa, countries with such resources receive the highest levels of capital inflows per capita, and since these investment opportunities rely on location rather than the benefits of private ownership, investors respond to economic policies by shifting their investments, to the private sector under capitalist policies and to the public sector under statist policies. In countries lacking natural resource endowments, however, statist policies deter investment. Such economies, however, attract investment in the private sector with both capitalist policies and democratic institutions, each of which can be expected to increase the profit opportunities of knowledge-dependent industries. Investor decisions do not depend solely on the decisions of governments in host countries, however. They are also influenced by external factors such as the profit opportunities in their home country relative to the profit opportunities in Africa, proxied here by the total flow of capital to Africa, as well as factors such as openness to trade, income level, and economic growth.

Based on these coefficients and annual data for each country, I have generated predicted values of public and private sector investment for each country-year, conditional on economic policy and regime type. These predicted values will be used to predict government decisions in each year. In years when funds for the public sector are particularly abundant, such as the 1970s, governments are expected to be drawn toward statist policies. In years when predicted funds for the public sector are scarce and/or funds for the private sector are abundant, governments are expected to shift to capitalist policies. Furthermore, a rise in the availability of capital for the private sector relative to the public sector is expected to motivate governments of economies that are not resource abundant to democratize, but not governments of resource-abundant economies. Instead, authoritarian governments of such regimes are expected to be more motivated than ever to retain hegemonic power, both to ensure the continuing inflow of private investment and to enjoy the benefits of holding office under such conditions.

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