The Political Economy of FDI 595 ensure their credibility by making the possibility of policy reversal more difficult. Multinationals that enter foreign markets can be reasonably confident that the gov- ernment policies in place when the firm entered the country will continue over time. A second potential reason for the credibility of democratic systems,more strongly supported than the veto player argument,can be found in the audience cost liter- ature.While the veto players in a political system generate higher levels of policy stability,an even more important component of credibility is a government's com- mitment to market friendly policies in the future.International relations theories find that democratic leaders are held accountable for their actions,including re- neging on a promise or threat.These audience costs can also be important for multinational investors.If governments make agreements with multinational firms and renege on the contracts after the investment has been made,democratic lead- ers may suffer electoral costs.The potential for these electoral backlashes may constrain democratic leaders. In a recent article,McGillivray and Smith argue that political leaders play an "Agent Specific Grimm Trigger Strategy,"in which political leaders in one coun- try refuse to cooperate with other political leaders that have"defected"in the past.9 Multinationals can also play this strategy with governments that institute legisla- tion or reverse policy in ways that negatively affect multinational corporations. Essentially,firms can hold individual leaders politically accountable for policy, and refuse to cooperate (invest)in the future.In democracies,citizens have the incentive and the opportunity to replace leaders with tarnished reputations through electoral mechanisms.Thus the leadership turnover in democratic systems (or the potential for leadership turnover)can be associated with more market-friendly pol- icies for multinationals. This argument on the role of leadership turnover in ensuring more market- friendly policies obviously ignores the potential political benefits of expropriation for leaders.In both democratic and authoritarian countries,there may be some immediate benefits to "expropriation."30 Political leaders may use the assets or income streams from policy changes to essentially "buy off"key support groups. My argument is that this holds for both authoritarian and democratic systems.In both types of regime,political leaders have a key support group,the"selectorate," that must be appeased for political survival.31 There is little reason to believe that democratic regimes are more likely to expropriate than authoritarian regimes. This complex interplay between individual political leaders and international capital markets permeates domestic politics in many countries.The relationship 29.McGillivray and Smith 2000. 30.For an interesting discussion of expropriation,see Thomas and Worrall 1994. 31.See Bueno de Mesquita et al.1999.The most logical extension of their theory would be that expropriation would be more likely in systems with smaller selectorates (authoritarian regimes).In systems with large selectorates (democracies)political leaders would have to spread the benefits of expropriation over a larger percentage of the citizenry,a making expropriation a less viable option.ensure their credibility by making the possibility of policy reversal more difficult+ Multinationals that enter foreign markets can be reasonably confident that the gov￾ernment policies in place when the firm entered the country will continue over time+ A second potential reason for the credibility of democratic systems, more strongly supported than the veto player argument, can be found in the audience cost liter￾ature+ While the veto players in a political system generate higher levels of policy stability, an even more important component of credibility is a government’s com￾mitment to market friendly policies in the future+ International relations theories find that democratic leaders are held accountable for their actions, including re￾neging on a promise or threat+ These audience costs can also be important for multinational investors+ If governments make agreements with multinational firms and renege on the contracts after the investment has been made, democratic lead￾ers may suffer electoral costs+ The potential for these electoral backlashes may constrain democratic leaders+ In a recent article, McGillivray and Smith argue that political leaders play an “Agent Specific Grimm Trigger Strategy,” in which political leaders in one coun￾try refuse to cooperate with other political leaders that have “defected” in the past+ 29 Multinationals can also play this strategy with governments that institute legisla￾tion or reverse policy in ways that negatively affect multinational corporations+ Essentially, firms can hold individual leaders politically accountable for policy, and refuse to cooperate ~invest! in the future+ In democracies, citizens have the incentive and the opportunity to replace leaders with tarnished reputations through electoral mechanisms+ Thus the leadership turnover in democratic systems ~or the potential for leadership turnover! can be associated with more market-friendly pol￾icies for multinationals+ This argument on the role of leadership turnover in ensuring more market￾friendly policies obviously ignores the potential political benefits of expropriation for leaders+ In both democratic and authoritarian countries, there may be some immediate benefits to “expropriation+”30 Political leaders may use the assets or income streams from policy changes to essentially “buy off” key support groups+ My argument is that this holds for both authoritarian and democratic systems+ In both types of regime, political leaders have a key support group, the “selectorate,” that must be appeased for political survival+ 31 There is little reason to believe that democratic regimes are more likely to expropriate than authoritarian regimes+ This complex interplay between individual political leaders and international capital markets permeates domestic politics in many countries+ The relationship 29+ McGillivray and Smith 2000+ 30+ For an interesting discussion of expropriation, see Thomas and Worrall 1994+ 31+ See Bueno de Mesquita et al+ 1999+ The most logical extension of their theory would be that expropriation would be more likely in systems with smaller selectorates ~authoritarian regimes!+ In systems with large selectorates ~democracies! political leaders would have to spread the benefits of expropriation over a larger percentage of the citizenry, a making expropriation a less viable option+ The Political Economy of FDI 595