594 International Organization sons to prefer investing in democracies.23 If democratic political institutions allow higher levels of cooperation between states,they may also allow for higher levels of cooperation between states and multinational corporations.In this article I high- light two mechanisms through which democratic institutions could attract higher levels of FDI inflows. The main advantage of democratic institutions to multinational investors is cred- ibility.FDI,while mobile ex ante,is relatively illiquid ex post.24 Once foreign capital is invested in a country,the firm is subject to policy change or reversal by the central government.Once multinational investments have been made,there are considerable political risks in the investment. These political risks come in a number of forms.The most obvious political risks,nationalization and expropriation,involve the loss of ownership by multi- nationals of their investments-but are now relatively uncommon.Even with the decreasing incidences of nationalization,multinationals still face considerable po- litical risks in terms of the expropriation of revenue streams.25 Governments can renegotiate tax rates,depreciations schedules,tariff rates,and a host of other pol- icies that directly affect multinational operations.Other indirect factors,such as the imposing of capital controls,devaluations,or other macroeconomic decisions not targeted specifically at multinational firms,but affecting the profitability of the investment,are also important.Multinational corporations are attracted to gov- ernments that can help minimize these political risks. Democratic institutions can be a mechanism by which to decrease these politi- cal risks.Democratic governments have been found to be more credible in making agreements in the international arena.26 Explanations for this range from the insti- tutional checks and balances within democratic systems to the "audience costs"gen- erated by elected leaders.Logically following from this large literature,democratic governments may also be more credible in their direct dealings with multinationals. One specific mechanism that leads democratic governments to higher levels of credibility is based on the number of veto players in a democratic political sys- tem.George Tsebelis argues that the existence of these veto players can increase policy stability.These veto players can include chambers of the legislature,a su- preme court,separation of the executive and legislative branches of government, or federal actors.27 Henisz argues that foreign firms change their entrance strat- egies into domestic markets conditional on the number of veto players.28 Demo- cratic governments have these institutional constraints in place,which may help 23.Bruce Russett pioneered a large part of the literature on the democratic peace.See Russett and Oneal 2001 for a review of the literature and a number of relevant empirical tests.Perhaps most rele- vant for this study,Russett and Oneal 2001,chap.6 find that democracies are more likely to trade with other democracies. 24.Vernon 1971 25.This is often referred to as"creeping expropriation." 26.See Cowhey 1993;Fearon 1994;Gaubatz 1996;McGillivray and Smith 1998;and Leeds 1999. 27.Tsebelis 1995. 28.Henisz 2000.sons to prefer investing in democracies+ 23 If democratic political institutions allow higher levels of cooperation between states, they may also allow for higher levels of cooperation between states and multinational corporations+ In this article I high￾light two mechanisms through which democratic institutions could attract higher levels of FDI inflows+ The main advantage of democratic institutions to multinational investors is cred￾ibility+ FDI, while mobile ex ante, is relatively illiquid ex post+ 24 Once foreign capital is invested in a country, the firm is subject to policy change or reversal by the central government+ Once multinational investments have been made, there are considerable political risks in the investment+ These political risks come in a number of forms+ The most obvious political risks, nationalization and expropriation, involve the loss of ownership by multi￾nationals of their investments—but are now relatively uncommon+ Even with the decreasing incidences of nationalization, multinationals still face considerable po￾litical risks in terms of the expropriation of revenue streams+ 25 Governments can renegotiate tax rates, depreciations schedules, tariff rates, and a host of other pol￾icies that directly affect multinational operations+ Other indirect factors, such as the imposing of capital controls, devaluations, or other macroeconomic decisions not targeted specifically at multinational firms, but affecting the profitability of the investment, are also important+ Multinational corporations are attracted to gov￾ernments that can help minimize these political risks+ Democratic institutions can be a mechanism by which to decrease these politi￾cal risks+ Democratic governments have been found to be more credible in making agreements in the international arena+ 26 Explanations for this range from the insti￾tutional checks and balances within democratic systems to the “audience costs” gen￾erated by elected leaders+ Logically following from this large literature, democratic governments may also be more credible in their direct dealings with multinationals+ One specific mechanism that leads democratic governments to higher levels of credibility is based on the number of veto players in a democratic political sys￾tem+ George Tsebelis argues that the existence of these veto players can increase policy stability+ These veto players can include chambers of the legislature, a su￾preme court, separation of the executive and legislative branches of government, or federal actors+ 27 Henisz argues that foreign firms change their entrance strat￾egies into domestic markets conditional on the number of veto players+ 28 Demo￾cratic governments have these institutional constraints in place, which may help 23+ Bruce Russett pioneered a large part of the literature on the democratic peace+ See Russett and Oneal 2001 for a review of the literature and a number of relevant empirical tests+ Perhaps most rele￾vant for this study, Russett and Oneal 2001, chap+ 6 find that democracies are more likely to trade with other democracies+ 24+ Vernon 1971+ 25+ This is often referred to as “creeping expropriation+” 26+ See Cowhey 1993; Fearon 1994; Gaubatz 1996; McGillivray and Smith 1998; and Leeds 1999+ 27+ Tsebelis 1995+ 28+ Henisz 2000+ 594 International Organization