180 International Organization natural resources,antitrust regulation,technology transfer requirements,intellec- tual property protections,and labor market regulation. In the context of our analysis,the connection between politics and FDI inflows hinges on the interaction between host governments and MNEs.Firms select in- vestment sites based on how well their ownership-specific and internalization ad- vantages mesh with location-specific benefits.21 Host government policies create location-specific conditions that affect how well a firm can exploit its advantages. The logic of international production discussed above suggests the following im- plications that set the stage for our analysis of the effects of democratic institu- tions on FDI infows.First,the MNE's ownership-specific and internalization advantages often result from,and are further enhanced by,the oligopolistic or mo- nopolistic market structures.Host government regulatory policies can limit the use of these advantages,particularly through the application of antitrust and other competition-oriented legislation.Second,endowed with the ownership-specific and internalization advantages,the MNE is more competitive than,and often displaces, indigenous firms in the host country.The host government may adopt industrial pol- icy that either protects indigenous businesses from the MNE or favors the MNE. Third,expecting FDI to bring about managerial skills and production technology beneficial to economic growth,the host government may offer foreign investors fi- nancial and fiscal incentives.Such incentives not only affect the choice of FDI lo- cation,but also strengthen the competitiveness of foreign investors.Finally,the MNE must rely on the host government for protection of its property rights in pro- prietary assets,without which its ownership-specific advantages would disappear. These implications depict a contrast between a good and a bad investment cli- mate for MNEs.A good climate is one in which the location-specific advantages existing in the host country facilitate the MNE's exploitation of its ownership- specific and internalization advantages.For example,the host government pro- vides favorable regulation,preferential treatment for MNEs,and sound property rights protection.Conversely,a bad investment climate is one where the condi- tions in the host country hinder the MNE from exploiting its ownership-specific and internalization advantages.Firms that enjoy monopolistic or oligopolistic po- sitions may shy away from host countries with strong antitrust regulation.MNEs may also balk at weak property rights protection and strong preferences of the host government for domestic firms.Domestic political institutions,because they define the policymaking environment,have significant effects on the quality of the investment climate. Suppressive Effect of Democratic Institutions on FDI Inflows The nature of domestic political institutions is defined largely by the relative strength of democratic versus autocratic characteristics of a country's political system.Gen- erally speaking,it depends on the degree to which citizens are able to choose how 21.Dunning1993,548-51.180 International Organization natural resources, antitrust regulation, technology transfer requirements, intellec￾tual property protections, and labor market regulation. In the context of our analysis, the connection between politics and FDI inflows hinges on the interaction between host governments and MNEs. Firms select in￾vestment sites based on how well their ownership-specific and internalization ad￾vantages mesh with location-specific benefih2' Host government policies create location-specific conditions that affect how well a firm can exploit its advantages. The logic of international production discussed above suggests the following im￾plications that set the stage for our analysis of the effects of democratic institu￾tions on FDI inflows. First, the MNE's ownership-specific and internalization advantages often result from, and are further enhanced by, the oligopolistic or mo￾nopolistic market structures. Host government regulatory policies can limit the use of these advantages, particularly through the application of antitrust and other competition-oriented legislation. Second, endowed with the ownership-specific and internalization advantages, the MNE is more competitive than, and often displaces, indigenous firms in the host country. The host government may adopt industrial pol￾icy that either protects indigenous businesses from the MNE or favors the MNE. Third, expecting FDI to bring about managerial skills and production technology beneficial to economic growth, the host government may offer foreign investors fi￾nancial and fiscal incentives. Such incentives not only affect the choice of FDI lo￾cation, but also strengthen the competitiveness of foreign investors. Finally, the MNE must rely on the host government for protection of its property rights in pro￾prietary assets, without which its ownership-specific advantages would disappear. These implications depict a contrast between a good and a bad investment cli￾mate for MNEs. A good climate is one in which the location-specific advantages existing in the host country facilitate the MNE's exploitation of its ownership￾specific and internalization advantages. For example, the host government pro￾vides favorable regulation, preferential treatment for MNEs, and sound property rights protection. Conversely, a bad investment climate is one where the condi￾tions in the host country hinder the MNE from exploiting its ownership-specific and internalization advantages. Firms that enjoy monopolistic or oligopolistic po￾sitions may shy away from host countries with strong antitrust regulation. MNEs may also balk at weak property rights protection and strong preferences of the host government for domestic firms. Domestic political institutions, because they define the policymaking environment, have significant effects on the quality of the investment climate. Suppressive Effect of Democratic Institutions on FDI Inflows The nature of domestic political institutions is defined largely by the relative strength of democratic versus autocratic characteristics of a country's political system. Gen￾erally speaking, it depends on the degree to which citizens are able to choose how 21. Dunning 1993, 548-5 1