Democratic Institutions and Investment Inflows 183 performance,their primary focus is to generate more revenues for the ruling clique.34 As long as they obtain increased revenues and benefits from foreign cap- ital,these rulers would tolerate the imperfect competition and concentrated mar- ket power of oligopolistic or monopolistic foreign firms.Narrow elite control further allows rulers to subdue dissenting voices within or outside of the regime.As a result,the weaker the host country's democratic institutions,the less likely the host government is to limit the monopoly or oligopoly position of the MNEs. Effect on host country industrial policy.Industrial policy is another arena in which democratic institutions in the host country degrade conditions for MNEs.Be- cause of their ownership-specific and internalization advantages and exposure to international competition,MNEs are typically more competitive than indigenous firms in the developing host country.While inward investment raises competition in the host country and may improve the allocation of resources,foreign firms typ- ically displace local businesses and even compete for loans in the host country.35 Just as with trade,the growing presence of more-competitive foreign firms often turns less-competitive local firms into losers.Local business owners and the un- employed,suffering concentrated losses,are likely to get organized and lobby for protective industrial policy from the government.While MNEs also bring about new jobs and resources,such benefits do not directly go to the displaced capital and workers. Grievances are likely to be more pronounced in developing countries,where social welfare systems are not well developed and provide limited compensation for displacement.36Where democratic institutions are strong,the opponents of FDI have multiple avenues to influence public policymaking.Domestic interests that lose out to the MNEs can resort to elections,campaign finance,interest groups, public protests,and media exposure.Under such pressures,the host government is compelled to cushion the blow to domestic losers by subsidizing less competi- tive indigenous firms,imposing more restrictive entry conditions on MNEs such as joint ownership,limiting the sectors open to foreign capital,or demanding solely foreign financing of initial investments.It also could pose more restrictive operat- ing requirements in terms of local purchases of capital goods and raw materials, local employment,the proportion of output to be exported,and the use of technol- ogy.37 These policies reduce the MNE's degree of control over its overseas pro- duction and weaken its competitiveness. 34.01s0n1993 35.Graham and Krugman 1995;and Stopford and Strange 1991. 36.Such societal opposition is discounted and indeterminate if local firms are concerned about for- eign retaliation or their own investment entry into foreign countries,as Jonathan Crystal shows to be the case with U.S.firms.In the developing world,however,local firms are not likely to have these con- cerns and thus are more likely to organize to pursue protection from the host government.Crystal 1998. 37.See Dunning 1993,559-60 for a review of the host government policies that affect inward investment.Although the latitude available for such policies has diminished in the context of the World Trade Organization(WTO)and other international agreements,an international regime on foreign in- ward investment is still lacking,and host countries have exhibited great creativity in maintaining ben- efits for domestic producers.Democratic Institutions and Investment Inflows 183 performance, their primary focus is to generate more revenues for the ruling clique.34 As long as they obtain increased revenues and benefits from foreign cap￾ital, these rulers would tolerate the imperfect competition and concentrated mar￾ket power of oligopolistic or monopolistic foreign firms. Narrow elite control further allows rulers to subdue dissenting voices within or outside of the regime. As a result, the weaker the host country's democratic institutions, the less likely the host government is to limit the monopoly or oligopoly position of the MNEs. Effect on host country industrial policy. Industrial policy is another arena in which democratic institutions in the host country degrade conditions for MNEs. Be￾cause of their ownership-specific and internalization advantages and exposure to international competition, MNEs are typically more competitive than indigenous firms in the developing host country. While inward investment raises competition in the host country and may improve the allocation of resources, foreign firms typ￾ically displace local businesses and even compete for loans in the host country." Just as with trade, the growing presence of more-competitive foreign firms often turns less-competitive local firms into losers. Local business owners and the un￾employed, suffering concentrated losses, are likely to get organized and lobby for protective industrial policy from the government. While MNEs also bring about new jobs and resources, such benefits do not directly go to the displaced capital and workers. Grievances are likely to be more pronounced in developing countries, where social welfare systems are not well developed and provide limited compensation for di~placement.~~ Where democratic institutions are strong, the opponents of FDI have multiple avenues to influence public policymaking. Domestic interests that lose out to the MNEs can resort to elections, campaign finance, interest groups, public protests, and media exposure. Under such pressures, the host government is compelled to cushion the blow to domestic losers by subsidizing less competi￾tive indigenous firms, imposing more restrictive entry conditions on MNEs such as joint ownership, limiting the sectors open to foreign capital, or demanding solely foreign financing of initial investments. It also could pose more restrictive operat￾ing requirements in terms of local purchases of capital goods and raw materials, local employment, the proportion of output to be exported, and the use of technol- ~gy.~~ These policies reduce the MNE's degree of control over its overseas pro￾duction and weaken its competitiveness. 34. Olson 1993. 35. Graham and Krugman 1995; and Stopford and Strange 1991. 36. Such societal opposition is discounted and indeterminate if local firms are concerned about for￾eign retaliation or their own investment entry into foreign countries, as Jonathan Crystal shows to be the case with U.S. firms. In the developing world, however, local firms are not likely to have these con￾cerns and thus are more likely to organize to pursue protection from the host government. Crystal 1998. 37. See Dunning 1993, 559-60 for a review of the host government policies that affect inward investment. Although the latitude available for such policies has diminished in the context of the World Trade Organization (WTO) and other international agreements, an international regime on foreign in￾ward investment is still lacking, and host countries have exhibited great creativity in maintaining ben￾efits for domestic producers