The Political Economy of FDI 593 higher demands for current consumption.17 More recently,work by Przeworski and Limongi has argued that this relationship is more complex than once thought.8 In an impressive statistical analysis,Przeworski,Alvarez,Cheibub,and Limongi find that there is no difference between the growth rates of democratic and author- itarian regimes.19 These theories on the effects of democracy on macroeconomic performance are relatively divergent with the literature on multinational investors and political re- gimes.The conventional wisdom is that multinationals prefer to invest in author- itarian regimes.Authoritarian leaders can provide multinational firms with better entry deals,because of the lack of popular pressure from below,and the repres- sion of labor unions to drive down wages.This relationship leads to higher levels of FDI inflows to authoritarian countries. The second of these arguments,on the role of authoritarian regimes in provid- ing a lower-cost workforce,does have some support in the literature.20 The real question is,does this translate into higher levels of FDI inflows?Most scholars studying FDI argue that the impact of low wages has been overemphasized as a determinant of FDI,and that the wage rate is just one of many decision factors for multinational firms.21 I will argue later that the impact of lower wages is offset by the positive impact of democratic institutions for multinationals. The other argument,on the role of authoritarian regimes in bargaining with firms, has also been greatly exaggerated.Most scholars assume that the lack of con- straints for authoritarian regimes leads to a more generous situation for multination- als.As Putnam argues,the logic of a two-level game provides both constraints and leverage to political leaders.22 Although the democratic constraints imposed on leaders may limit the amount of discretion in offering deals to multinationals, this lack of discretion can also provide benefits to multinational firms. More specifically,most scholars fail to consider the possibility that the con- straints imposed on political leaders within democratic systems could translate into a beneficial situation for MNEs.I argue that these constraints lead to higher levels of policy stability and more favorable policies toward multinationals. The extensive and growing literature on the democratic peace in international relations argues that political regimes influence relationships between nation- states.This literature is helpful in understanding the potential benefits of demo- cratic governance structures for foreign investors.Beyond the obvious benefits of democratic states avoiding conflict with other democracies and winning the con- flicts in which they engage authoritarian states,multinationals may have other rea- 17.Huntington 1968. 18.Przeworski and Limongi 1993.See also Barro 1996. 19.For a review of the literature,see Przeworski and Limongi 1997;and Przeworski et al.2000. 20.Rodrik 1999. 21.Markusen 1995. 22.Putnam 1988.higher demands for current consumption+ 17 More recently, work by Przeworski and Limongi has argued that this relationship is more complex than once thought+ 18 In an impressive statistical analysis, Przeworski, Alvarez, Cheibub, and Limongi find that there is no difference between the growth rates of democratic and author￾itarian regimes+ 19 These theories on the effects of democracy on macroeconomic performance are relatively divergent with the literature on multinational investors and political re￾gimes+ The conventional wisdom is that multinationals prefer to invest in author￾itarian regimes+ Authoritarian leaders can provide multinational firms with better entry deals, because of the lack of popular pressure from below, and the repres￾sion of labor unions to drive down wages+ This relationship leads to higher levels of FDI inflows to authoritarian countries+ The second of these arguments, on the role of authoritarian regimes in provid￾ing a lower-cost workforce, does have some support in the literature+ 20 The real question is, does this translate into higher levels of FDI inflows? Most scholars studying FDI argue that the impact of low wages has been overemphasized as a determinant of FDI, and that the wage rate is just one of many decision factors for multinational firms+ 21 I will argue later that the impact of lower wages is offset by the positive impact of democratic institutions for multinationals+ The other argument, on the role of authoritarian regimes in bargaining with firms, has also been greatly exaggerated+ Most scholars assume that the lack of con￾straints for authoritarian regimes leads to a more generous situation for multination￾als+ As Putnam argues, the logic of a two-level game provides both constraints and leverage to political leaders+ 22 Although the democratic constraints imposed on leaders may limit the amount of discretion in offering deals to multinationals, this lack of discretion can also provide benefits to multinational firms+ More specifically, most scholars fail to consider the possibility that the con￾straints imposed on political leaders within democratic systems could translate into a beneficial situation for MNEs+ I argue that these constraints lead to higher levels of policy stability and more favorable policies toward multinationals+ The extensive and growing literature on the democratic peace in international relations argues that political regimes influence relationships between nation￾states+ This literature is helpful in understanding the potential benefits of demo￾cratic governance structures for foreign investors+ Beyond the obvious benefits of democratic states avoiding conflict with other democracies and winning the con- flicts in which they engage authoritarian states, multinationals may have other rea- 17+ Huntington 1968+ 18+ Przeworski and Limongi 1993+ See also Barro 1996+ 19+ For a review of the literature, see Przeworski and Limongi 1997; and Przeworski et al+ 2000+ 20+ Rodrik 1999+ 21+ Markusen 1995+ 22+ Putnam 1988+ The Political Economy of FDI 593