PD5 - Research Paper. Rozen-Bakher, Z. A Regime Type as a Location Factor of FDI: Democracy, Communism, Absolute Monarchy, Religious Regime, and Military Regime

23 Mar

Rozen-Bakher, Z. A Regime Type as a Location Factor of FDI: Democracy, Communism, Absolute Monarchy, Religious Regime, and Military Regime. Research Paper, PD5. https://www.rozen-bakher.com/research-papers/pd5

Rozen-Bakher, Z.

A Regime Type as a Location Factor of FDI: Democracy, Communism, Absolute Monarchy, Religious Regime, and Military Regime

Abstract

This study explored the regime type as a location factor of FDI to predict the political risk for FDI Inward in a host country due to a dynamic of regime transformation. The study examined five regime types: democratic regime, communist regime, absolute monarchy regime, religious regime, and military regime. The study revealed that exists a low risk for FDI Inward in a full democratic regime, yet it can be transformed into a partially democratic regime via legal tactics, which may increase the political risk. The likelihood for a regime transformation in the remaining communist regimes is relatively low, particularly via a democratic revolution, despite the lack of political rights in communism. In religious regimes, if the share of minorities’ religious and seculars is too big to ignore, then it may lead to resistance to religious coercion that may end in a regime transformation, which may increase the political risk for FDI. In an absolute monarchy, FDI Inward has the potential for high profits, but it may involve high political risk, particularly in a kingdom with a history of a ‘monarchy coup’. A military regime can provide the highest profits, yet it may involve a ‘bribe risk’ and a ‘coup risk’. The study concluded that a low risk of FDI is associated with low profitability of FDI mainly in a full democratic regime, while a high risk of FDI is associated with the high profitability of FDI mainly in military regimes and absolute monarchy regimes.

Keywords: Democracy, Communism, Absolute Monarchy, Religious Regime, Military Regime, Foreign Direct Investment (FDI), Location Factor, Regime Transformation, Political Risk.

Introduction

The Foreign Direct Investment (FDI) literature considers the political instability as one of the crucial location factors that determine FDI Inward (Aguiar et al., 2012; Bano et al., 2009; Burger et al., 2016; Busse & Hefeker, 2007; Cooke,2001; Habib & Zurawicki, 2002; Gastanaga et al., 1998; Globerman & Shapiro, 2003; Godinez & Liu, 2018; Loree & Guisinger, 1995; Nigh, 1985; Rafat & Farahani, 2019; Rashid et al., 2017; Rozen-Bakher, 2017; Samimi et al., 2011; Sethi et al., 2003; Trevino & Mixon, 2004), which is founded theoretically on the OLI framework of Eclectic Paradigm (Dunning & Lundan, 2008). Political instability can occur due to undermining of the political conditions at the country level because of various reasons: Firstly, political instability can occur due to internal conflicts, such as ethnic tensions (De Nevers, 1993; De Vries, 2002; Rafat & Farahani, 2019), religious tensions (Rafat & Farahani, 2019; Wijsen, 2004), protests (Brancati, 2016; Cai, 2010; Della Porta, 2020; Mooijman et al., 2018; Nossiter, 2019; Psimitis, 2011), strikes (Cooke, 2001; Wise, 2019), guerrilla wars (Krcmaric, 2018; landau, 1993), terrorism by internal actors (Enders & Sandler, 1996; Subramaniam, 2012), resistance movements (Jean-Klein, 2001; Wagnr, 2008), civil wars (O’balance, 1998), riots (Nossiter, 2019; Wilkinson, 2009), and coups (Elumami & Laessing, 2019; Gasiorowski, 1987; Thyne & Powell, 2016). Secondly, political instability can also occur due to external conflicts (Rafat & Farahani, 2019) such as, wars (Barbieri & Levy, 1999; Brecher & Geist, 1980; Chaudhry, 1991), terrorism by external actors (Khan & Estrada, 2016), embargo (Andreas, 2005; White, 2019), international boycotts (Stone & Trew, 2019; Weiss, 2007), international sanctions (Nasre Esfahani & Rasoulinezhad, 2017), diplomatic crises (Faizullaev & Cornut, 2017), and trade wars (Bouët & Laborde, 2018; Noland, 2017). Thirdly, a fall of governments (Golder & Thomas, 2014) and repeated general elections can also undermine the political stability in a country (Busse & Hefeker, 2007), such as the four repeated general elections in Israel over 2 years (04/2019, 09/2019, 03/2020, 03/2021) (The Knesset, 2021). Even dispute over election results can also lead to deterioration of political stability, such as the civilian-military riot that was occurred in the USA following the call of Trump to protest the results of the presidential election in 2020 (Segers, 2021), or as the case of the military coup in Myanmar following the strife over the election results (Stoakes & Safi, 2021). Fourthly, political instability occurs when governments make unexpected changes in government policy (Trevino & Mixon, 2004) or even when governments plan to make a drastic policy change. For example, Brexit led to an internal fight among the UK political actors that was reflected in unusual political maneuverers, such as taking control of the 'Commons Business' by MPs to prevent no-deal (Wills, 2019), or forcing the resignation of PM Theresa May (Stewart, 2019) by the Tories Party in order to replace her by the Hard-Brexiter, PM Boris Johnson (Roberts, 2019), or even the unlawful shutdown of the UK parliament by PM Boris Johnson (Brown, 2019; Shirbon & Holden, 2019). Fifthly, even a failure of a government to implement its obligations and agreements can undermine political stability (Globerman & Shapiro, 2003; Li & Resnick, 2003; Trevino & Mixon, 2004). Sixthly, lack of personal security, problems with property rights, restrictions on press freedom, and corruption may also undermine the political stability in a country (Busse & Hefeker, 2007; Habib & Zurawicki, 2002; Gastanaga et al., 1998; Globerman & Shapiro, 2003; Godinez & Liu, 2018; Li & Resnick, 2003; Trevino & Mixon, 2004).

Considering the outlined above, previous FDI studies showed that political instability as a location factor negatively impacts the scope of FDI Inward (Dunning & Lundan, 2008), especially in developing countries (Rozen-Bakher, 2017). Nigh (1985) found that internal political conflicts (e.g. demonstrations) in a host country negatively affected FDI inward, but only in developing countries, while external political conflicts (e.g. wars) negatively affected FDI inward in both developing and developed countries. However, Loree & Guisinger (1995) showed that in 1977, political stability had no significant influence on FDI inward among 48 host countries, while in 1982, the trend changed, and it showed a significant impact that may be explained by the changing in attitude toward political risk (Loree & Guisinger, 1995). Gastanaga et al. (1998) found that a low level of corruption significantly and positively affected FDI inward in 49 developing host countries during the years 1970-1995. Cooke (2001) found that multiple working strikes significantly and negatively affected the volume of FDI inward in developing host countries. Globerman & Shapiro (2003) found that corruption, violation of human rights and freedom significantly and negatively affected FDI inward in 143 host countries during the years 1995-1997. Trevino & Mixon (2004) showed that political instability significantly and negatively affected the volume of FDI inward in 7 developing host countries in Latin America during the years 1988-1995. Busse & Hefeker (2007) showed that governmental stability and lack of internal conflicts, external conflicts, corruption, and ethnic tensions significantly and positively affected FDI inward in 83 developing host countries during the years 1984-2003. Bano et al. (2009) showed that political instability had a long-term adverse effect on FDI inflows to Pakistan in the pre-global financial crisis. Samimi et al., (2011) showed that political stability had a detrimental effect on FDI inward in 16 Islamic countries (OIC) during the years 2002-2009. Burger et al., (2016) showed that political shocks negatively influenced greenfield FDI Inward to the Middle East and North Africa in the non-resource tradable sectors during the years 2003-2012, while natural resource sectors and non-tradable activities apparently showed insensitive to such political shocks. Rozen-Bakher (2017) found that economic and political stability significantly and positively affected FDI inward, yet only in developing countries during the years 2000-2008. Rashid et al., (2017) showed that political stability positively influenced FDI inflows in the long run in 15 Asia Pacific countries during the years 2000-2013. Rafat & Farahani (2019) showed that external conflict, ethnic tensions, and religious tensions were highly significant factors in the determination of FDI inflows in Iran during the years 1985-2016.

In the spite of the above, there is a difference between a location factor of political instability and a location factor of regime type. Political instability reflects the level of unstable political conditions in a country as outlined above. Conversely, a regime type reflects the characterises of a regime in terms of how leadership manages the country institutions and the level of freedom, regardless of the current political conditions, stable or unstable. Hence, each regime type has a different leadership type that manging the freedom in a different way namely, full-democracy or partly-democracy or full-authoritarian, which affects FDI inward differently in terms of scope and risk. Considering that, political instability as a location factor allows knowing about the deterioration of political stability in a country that was already occurred in the PAST, while the regime type as a location factor allows predicting the political risk in the FUTURE. From the viewpoint of policymakers and Multinational Enterprises (MNEs), there is a fundamental difference between knowing about unstable political conditions that were already occurred in the PAST in a host country versus predicting political risks that may occur in the future in a host country. To illustrate it, on 01 February 2021, the world waked up to the news about the military coup in Myanmar (Mahtani & Lynn, 2021). Thereby, this coup will appear in future political instability reports about Myanmar. Still, these reports will not be helpful for those countries or MNEs that already conducted FDI Inward in Myanmar before the coup because any military coup leads to significant negative implications to the business community, especially to foreign firms as in the case of Myanmar (Keyes, 2021). To fill the research gap outlined above, this study explores the regime type as a location factor of FDI to predict the risk for FDI in a host country, rather than focusing on the causes for political instability that occurred in the past. To address it, the study explores the regime type at two layers of analysis namely, the characteristics of regime type and the level of freedom with the aim of predicting how the regime type impacts the risk for FDI Inward. Hence, the study compares regime types based on characteristics of regime type namely, Democracy versus Communism versus Absolute Monarchy versus Religious Regime versus Military Regime. The study also compares regime types based on the level of freedom namely, full democracy versus partial democracy versus repressive regime.

The paper is organized, as follows. The next section includes three parts. The first part discusses the characteristics of regime type by comparing Democracy versus Communism versus Absolute Monarchy versus Religious Regime versus Military Regime. The second part discusses the level of freedom among regimes by comparing a full democratic regime versus a partial democratic regime versus a repressive regime. The third part discusses how regime type as a location factor impacts the risk for FDI Inward. The final section discusses the conclusion.

Regime Type – Characteristics and Level of Freedom: Two Layers of Political Risk for FDI Inward

The literature mainly classifies the regime type based on the characteristics of each regime type, such as democracy versus communism. However, regime type should be sorted based on two layers to get a deeper understanding of the political risk of each regime. Hence, the study classifies the regime type based on two layers of political risk namely, layer I based on the characteristics of each regime type and layer II based on the level of freedom amongst regimes. That assumes that the level of freedom may not be similar among regimes from the same regime type based on the same characteristics. For example, exists various of the level of freedom among democratic regimes, as well as among repressive regimes. In other words, looking only at one layer will not provide the full deeper understanding that requires for analysing the political risk of regime type with the aim of predicting the risk for conducting FDI Inward in a certain regime. Hence, this study explores the two layers of regime types in terms of characteristics and level of freedom to reveal the potential future risk for FDI at the level of a host country, as discussed below.

Layer I – Characteristics of Regime Types: Democratic Regime vs. Communist Regime vs. Absolute Monarchy Regime vs. Religious Regime vs. Military Regime

The first layer of regime type is based on the characteristics of each regime type. Thereby, if we sort the regimes worldwide that exist in the 21st century based on characteristics, then it shows that exist five main regime types namely, Democracy, Communism, Absolute Monarchy, Religious Regime and Military Regime, as follows.

Democratic Regime. In a democratic regime (Achen & Bartels, 2016; Dahl, 2020; O’donell, 1994; Schmitter & Karl, 1991), the government gets the power to manage the country through a free general election, while legislature and courts serve as ‘checks and balances’ to preserve the democracy and freedom. However, there are two main types of democratic regime namely, Liberal Democracy and Social Democracy that differ from each other at the economic and political levels, such as The Netherlands as liberal democracy (Andeweg & Irwin, 2002) versus Portugal as social democracy (Hatton, 2019). At the economic level, liberal democracy (Carson, 2017; Dunleavy, 1987; Held & McGrew, 1993; Gillies et al., 2002) is based on the idea of capitalism namely, a free-market economy without government intervention in the market through regulation. Thereby, in an open economy, monopolies and cartels are eliminated, governmental companies are privatized (Hodge, 2018; Levi-Faur & Rozen-Bachar, 2011), and property rights are protected (Mukand & Rodrik, 2020). Consequently, in a liberal democracy, fewer restrictions and barriers exist regarding FDI. Conversely, social democracy (Berman & Snegovaya, 2019; Brus & Laski, 1991; Carson, 2017; Esping-Andersen, 2017; Huber et al., 1993; Przeworski, 1986) is based on the idea that government should act for the common good. Thus, social democracy places great emphasis on the welfare-state (Barr, 2020), so the government uses regulatory measures to control the availability and prices of public services and basic goods. Therefore, in a mixed economy, exist monopolies or limited competition in regulated sectors, while free competition in other sectors, so certain industries are restricted to FDI inward. At the political level, liberal democracy more preserves individual rights (Mill, 1859), while social democracy more preserves the collective rights, such as the differences between liberal democracy and social democracy regarding the rights for euthanasia (Kouwenhoven et al., 2019) or abortion (Machado & Maciel, 2017) or LGBT (Ayoub & Paternotte, 2019). Hence, in a liberal democracy, the risk for transformation from a democratic regime to a repressive regime is low due to the stronghold of freedom values, while in social democracy, the risk for transformation from a democratic regime to a repressive regime is higher, particularly if the regime was previously a communist regime or military regime or absolute monarchy, especially in the near past, such as the cases of Eastern European countries (Baczynska, 2020; Mueller, 2014).

Communist Regime. In a communist regime, (Brodsgaard & Yongnian, 2006; Engels & Marx, 2004; Hardt, 2010; Kornai, 1992), the communist party runs the country without elements of democracy, such as general election and freedom. At the economic level, the production, assets, and services in a country are owned and managed by the country (Engels & Marx, 2004). Thereby, a communist regime acts in a style of command economy namely, the government involves in the production of local products in terms of types of products, quantity, and prices. Thus, in communism, exists a high level of government ownership with monopolies in many sectors, yet a communist regime opens to FDI Inward, but under significant restrictions that align to a communist regime (Gorg, 2005; Kornai, 1992). Besides, communism is based on the idea that the wealth of the country should distribute equally among citizens (Engels & Marx, 2004), such as in the former communist regime, the Union of Soviet Socialist Republics (USSR) (Lane, 2019; Rigby, 2019). Today, exist only four communist regimes worldwide namely, China, Cuba, Laos, and Vietnam (Brodsgaard & Yongnian, 2006; CIA, 2021; Horowitz, 1995). Even though, some refer to North Korea as a communist regime (Saxonberg, 2013; Scobell, 2005), despite that its ideology does not base on communism but on Juche ideology (Suh, 2012), yet the Juche regime in North Korea is similar to characteristics of a communist regime. Importantly, despite that a communist regime restricts political and freedom rights, then paradoxically, the remaining communist regimes worldwide have relatively long-term political stability (Wright & Bak, 2016; Zheng, 2017). Thus, the likelihood of regime transformation in these communist regimes is relatively low, particularly via revolution, especially in China (Saxonberg, 2013). China has relatively political stability (Zheng, 2017), while the unrest in Hong Kong may not represent the mainland of China because Hong Kong transformed overnight from a full-democracy to a repressive regime when the sovereignty of the UK in Hong Kong ended in 1997 (Ash et al., 2000). Thus, obviously that such dramatic transformation will lead to political unrest (Cheung, 2009; Newburn, 2020). Nevertheless, many explanations were given for the political stability in China, such as ‘too big to fall’, sophisticated internal public policy that keeps the ‘flames low’, relatively open economy, advanced technology, developed infrastructure, splitting the political communist ideology from the economy and more (Burns & Zhiren, 2010; Jiang & Esarey, 2018; Yue & Yang, 2017; Zheng, 2017). Even the policy of ‘Hidden Unemployment’ (Porket, 1995) to keep the unemployment low by creating over quantity of jobs that are not really required to fulfil the demand of production and service (Wong & Kinglun, 1997), may also explain the political stability in China. In other words, it’s not obvious in the 21st century that a capitalist-democracy will succeed to create jobs for a population of 1400 million people without unemployment, poverty and even homelessness, such as India (Bhardwaj, 2018; Dat et al., 2020; Thiyagarajan et al., 2018) that its population size is similar to China (Around 1,400 million people (IMF, 2021), still, in democratic India, the GDP per capita is 6,283 US$ versus 17,206 US$ in the communist China (IMF, 2021). Thus, ‘jobs protection’ via ‘hidden unemployment’ that exists in communism compared to ‘actual unemployment’ in capitalism may additionally explain the relative political stability in China, despite the lack of political rights. Importantly, the openness of China to capitalist countries (e.g. news, tourism, study, work, and trade) may paradoxically reduce the resistance to communism in China because of poverty, unemployment and homelessness that exist in capitalist countries (Dat et al., 2020; Thiyagarajan et al., 2018) and visible via global news. Given that, a bigger country size may reduce the likelihood of regime transformation in big communist countries. Nevertheless, perhaps, the best explanation for the relative political stability in China is the survival of China as a big communist country compared to the big communist country USSR (Population of 288 million (WPR, 2021)) that collapsed in 1991 (Dallin, 1992). USSR was suffered from an ineffective economy and corruption (Dallin, 1992; Heinzen, 2007), while China puts efforts to create an effective economy (Burns & Zhiren, 2010) that open to trade and investment (Riedel et al., 2020) alongside anti-corruption policy (He, 2000). Given that, the expectation that the relative political stability that exists today in communist regimes may continue in the future, despite the lack of political and freedom rights, especially in big communist countries.

Absolute Monarchy Regime. In an absolute monarchy regime (Alaoudh, 2017; Blum. 2017; Swann & Felix, 2013), the monarch rises to power not based on a general election or elite election but based on the right to be the heir to the throne, unrelatedly if the heir fits or not, to be a ruler in terms of age, skills, and personal characteristics. Hence, in an absolute monarchy, a king, an heir to the throne, and the royal family have unlimited power in running the country, such as the absolute monarchy in Saudi Arabia (Alaoudh, 2017). However, it is important to distinguish between an absolute monarchy and a constitutional monarchy. In a constitutional monarchy (Barker, 1944; Shore, 2018), the monarch has a symbolic power under the constitution of the country, while the government and parliament are in charge to manage the country, yet the expectation that the monarch will not interfere with the managing of political affairs, such as the constitutional monarchy in England (Barker, 1944) and Spain (Gilmour, 1985). Today, most of the existing monarchies are constitutional monarchies, rather than absolute monarchies (Blum, 2017). Even though there are countries that are formally considered a constitutional monarchy, yet the sovereign uses his power to influence the political arena (Shore, 2018). For example, in 2014-2016, several amendments were made to Jordan constitution that gives to King Jordan the sole authority to appoint important key positions (e.g. Chief of Constitutional court, Head of Military, and Intelligence Director) (Al-Sharif, 2014; Younis, 2016), despite it contradicts the principle of separation of power that should be in a constitutional monarchy. Even the monarch of Liechtenstein got in 2012 unlimited power via a controversial referendum that allows him to veto any law and even to dismiss governments and ministers (Langley, 2013), which contradicts the principles of constitutional monarchy. Hence, in the 21st century, there are countries that are formally considered a constitutional monarchy, but they de-facto reflect a combination of constitutional monarchy/absolute monarchy, such as Jordan (Al-Sharif, 2014) and Liechtenstein (Langley, 2013).

Religious Regime. Religion reflects a set of beliefs in the mighty power of one god (monotheism) or several gods (monolatry) that are responsible for the universe (Wach, 2016; Woodhead et al., 2016). Thus, a person who believes in a certain religion is required to follow the rules of the religion and to engage in religious worship. Hence, in a religious regime (Beeman, 1986; Driessen, 2014; Hamayotsu, 2020), the government runs the country based on the laws of the dominant religion, while other religious minorities or even secular persons must obey the rules of the dominant religion. Therefore, in a religious regime, exist religious coercion (Cohn, 2002; Pinkkus & Meyer, 2008) against the religious minorities by imposing religious restrictions according to the ruling religion to preserve its dominant (Ahdar, 2012; Cohen & Susser, 2000; Friedmann, 2003), either among minorities from other religious or from the same religion, such as the tension between the Jewish Orthodox religious and the Jewish Liberal religious (Cohen-Almagor, 2017; Helfand, 2019). Therefore, in religious regimes, conflicts more often arise due to the constant tension between individual freedom and the religious rules that are imposed by the dominant religion in the country (Cohen & Susser, 2000; Cohn, 2002). Nonetheless, there is a difference among religious regimes regards the level of religious coercion. In other words, the level of religious coercion defines the level of religious freedom in a certain religious regime (Pinkkus & Meyer, 2008). Even though, inherently, a religious regime cannot be considered as a full democracy (Smooha, 2002) because of the religious coercion that jeopardizes the freedom even if exist elements of democracy, such as the case of Israel (Cohen & Susser, 2000; Cohn, 2002; Smooha, 2002) that de-facto runs the country as a Jewish religious regime. Notably, there are many countries that the dominant religion is important, such as the Catholic-Christianity in Italy, still, despite the most important Christianity figure, the Pope sits in Vatican-Italy, there is no religious coercion of Christianity against other religious minorities in Italy (Ferrari, 2018). However, in a religious regime, the religious coercion of the dominant religion impacts any aspects of the daily life of other religious minorities without giving them real religious freedom (Pinkkus & Meyer, 2008). For example, in Iran, any woman must put a hijab even if the woman is not Muslim or secular (Koo & Han, 2018). Even in Israel exists significant religious coercion against other religious minorities (e.g. Islam) or even against Jewish seculars, which significantly impacts their daily life (Cohen & Susser, 2000; Cohn, 2002), such as that public transportation no operates in Shabbat and Jewish holidays in Israel (Arutz Sheva, 2017) even not from airports, while roads near synagogues are closed for cars entry, and Jewish villages are even entirely closed during the Shabbat. Even non-kosher food is not available at most supermarkets in Israel (Heiman et al., 2019), while in Jewish religious cities even stores and gas stations are closed during the Shabbat (Lis, 2018; Times of Israel, 2018). Notably, there are countries that have a combination of two regime types, such as Saudi Arabia that has a combination of absolute monarchy and an Islamic religious regime (Buchan, 2015). Thereby, in Islamic religious regimes, the religious coercion is even worse, such as in the case of Saudi Arabia and Iran (Buchan, 2015), still, paradoxically, the Islam restrictions in Saudi Arabia are more rigid than in Iran. In Saudi Arabia, non-Islam houses of worship are forbidden including forbidden to practice in non-Islam worship (USCIRF, 2017), while a person may even risk in a death penalty in Saudi Arabia for smuggling and possessing non-Islam holy books (e.g. Bibles) (Smith, 2014). However, in Iran, non-Islam houses of worship are permitted (e.g. churches and synagogues) including practising in non-Islam worship, while the Iranian government even reserves seats in the Iranian parliament for recognized religious minorities, such as Christianity, Judaism, and the Sunni branch (Brock & Levers, 2007). Moreover, in Saudi Arabia women must wear a Burqa (full cover of the body and face), while Iranian women must wear only a hijab (only cover of the head) (Koo & Han, 2018). Besides, Saudi Arabia has only Muslim citizens, so Christian foreign workers cannot even get a permanent residence permit nor apply for the citizenship of Saudi Arabia, while Iran has non-Muslim citizens, such as Christian, Zoroastrians and Jews (CIA, 2021). Importantly, in Saudi Arabia, there are no political rights because it is an absolute monarchy, while in Iran a free general election takes place for the President of Iran with a limited of a maximum of two terms (four years each term), yet the president of Iran should be approved by the religious supreme leader and act according to his guidance (Iran Parliament, 2021; UNIBE, 2020). Given that, Saudi Arabia may be considered as a ‘monarchy religious regime’, while Iran may be considered as a ‘partial democracy religious regime’ because Iran grants some political and religious rights to its citizens according to its constitution ̶ ‘Theocratic and Democratic Elements’ from 1979 (Iran Parliament, 2021; UNIBE, 2020). In spite of the religious coercion that exists in religious regimes, paradoxically, religious regimes have a lower risk for regime transformation, especially in countries in which the religious tradition has been rooted in the country for hundreds of years, such as in Iran (Beeman, 1986) and Saudi Arabia. In the case of Iran, the religious regime stability (over 40 years since the revolution in 1979) may be also explained by the bad memory of the previous absolute monarchy of the Shah (Kurzman, 2009; Takeya, 2021). The bad memory of the SAVAK-secret police of the Shah that tortured and executed many Shah opponents (Baraheni, 1976) may still impact the political arena in Iran. In other words, it can be argued that from the standpoint of the Iranian people, the Islamic religious regime that runs as partial democracy is much better than what it was under the Shah regime. Considering the above, if a country has religious coercion that significantly impacts the daily life of the religious minorities and seculars, then the country should be considered as a religious regime. Besides, in a religious regime, the constitution and laws give priority to the dominant religion over other religions, such as the new ‘Nationality Bill’ of Israel that defines Israel as a ‘Nation-State of the Jewish People’ (The Knesset, 2019), despite that this law contradicts the principle of the ‘Israeli Declaration of Independence’ that equal rights should be given to all Israeli citizens, regardless of their religion (The Knesset, 2021). Hence, the most important indication for regime transformation to a religious regime is if the regime passed amendments to the constitution or new laws that give priority to the dominant religion by creating de-facto religious coercion against other religious minorities and seculars in a way that impacts their daily life.

Military Regime. In a military regime (Agyeman-Duah, 1990; Napolitano, 2018; Schneider, 2011), a military officer rises to power following a military coup (Agyeman-Duah, 1990; Belkin & Schofer, 2003; Luttwak, 2016; Londregan & Poole, 1990; Shipley, 2018; Sombatpoonsiri, 2017; Tendi, 2020; Thyne & Powell, 2016) without general election or elite election, such as the military regimes in Africa (Agyeman-Duah, 1990; Tendi, 2020). Hence, in a military regime, military officers manage forcibly the country affairs without any respect for human rights (Kingsley, 2014; Rutherford, 2018) or even without a decent court system that respect justice, such as the fast-secret legal proceeding that carried out against the ousted leader Aung San following the military coup in Myanmar in 2021 (Beech, 2021). Notably, there is a difference between a temporary military regime and a permanent military regime. A temporary military regime can be conducted in a situation of ‘State of Emergency’ for a limited period (Fassin & Pandolfi, 2010), while a permanent military regime is established following a military coup or in occupied territories, such as the permanent Israeli military regime that controls occupied Palestine through Israeli soldiers and the Israeli military court over more than 50 years since 1967, so it considered as the longest military occupation regime worldwide (Hajjar, 2005; Pelleg-Sryck, 2011; Roberts, 1990). Nevertheless, a temporary military regime following ‘State of Emergency’ can transform into a permanent military regime if it is run too long without preserving human rights and civil rights, such as the case of Turkey that following the failed attempt coup in 2016, over two years Turkey conducted unprecedented purges against military officers, civil servants, and private citizens under formal ‘State of Emergency’ (Kenner, 2017). Still, when the formal ‘State of Emergency’ ends, then it has replaced with new laws that gave the President of Turkey, Erdogan the power to continue running de-facto ‘State of Emergency’ including purges (Keller et al., 2016; Kenner, 2017; Kynyon, 2018). Considering the above, a military regime is the most problematic regime type among repressive regimes in terms of political risk because of the reason that all the power is in the hand of military officers. Importantly, if a regime is currently a democracy, but suffered in the past from a military coup or ruled by a military junta, then exists the risk for reversal transformation to a military regime, such as the case of Myanmar that was ruled by a military junta from 1962 until 2011, and then it functioned as a democracy until the military coup in 2021 that reverse the country to a military regime (Egreteau, 2016; Devi, 2014; Huang, 2013; Mahtani & Lynn, 2021). Notwithstanding, as the time passed since the last military coup/military regime, then the risk for reversal transformation to a military regime is reduced.

Layer II – Level of Freedom of Regime Type: Full Democratic Regime vs. Partial Democratic Regime vs. Repressive Regime

The second layer of regime type is based on the level of freedom. In other words, regardless of the characteristics of each regime type outlined above, each regime can have a different level of freedom namely, full freedom or partial freedom or repressive (no freedom). At the terminology level, full freedom is similar to a full democratic regime, partial freedom is similar to a partial democratic regime and repressive is similar to a repressive regime. Nevertheless, democracies are usually considered as a full democratic regime or as a partial democratic regime, while religious regimes are usually considered as a partial democracy or as a repressive regime. Conversely, communism, absolute monarchy and military regimes are usually considered repressive regimes. Nevertheless, when a regime undergoes a transformation, either from a democracy to a repressive regime, or vice versa, from a repressive regime to a democracy, then the formal status of the regime type may not represent the regime type of a country, such as the cases of Liechtenstein and Jordan that are formally considered as ‘democracy-constitutional monarchy’ regimes, but these countries are de-facto ‘partial democracy-absolute monarchy’ regimes (Al-Sharif, 2014; Langley, 2013). Therefore, a partial democracy can exist when a regime undergoes a transformation in both directions. Importantly, the level of freedom reflects a scale, yet it is possible to generalize the characteristics of a full democratic regime versus a partial democratic regime versus a repressive regime, as follows.

Full Democratic Regime. A full democratic regime is equivalent to a full freedom regime. The literature suggests that democracy with full-freedom should have the following characteristics (Altman & Perez-Linan, 2002; Beetham, 2004; Christiano, 2018; Dahl, 2020; Gould, 1990; Schmitter & Karl, 1991): Firstly, a full democracy should have a free general election without creating manipulation to change the election results. Besides, a full democracy should keep the political right to hold protests and strikes without protests repression (e.g. tear gas or water cannons) (Aytac et al., 2017) or without bureaucratic restrictions (e.g. not giving permission to protest) (Hovel, 2017) that de-facto prevents the right to demonstrate. Secondly, a full democracy should allow the freedom of opinion and expression, free press, freedom to establish labour unions and religious freedom. Thirdly, a full democratic regime should protect human rights, civilian rights, and property rights. Fourthly, a public administration in a full democracy should operate under the principles of transparency, comptroller mechanism, and limited terms for high-rank public office. Fifthly, in a full democracy exists ‘checks and balances’ through a separation of power between parliament, government and courts. In spite of the above, a full democracy can transform from partial democracy or even from a repressive regime, such as the republic revolution in Portugal that happened in 1974 when a military coup ended 50 years of an autocratic regime (Fishman, 2011), while a year later, in 1975, the first democratic general election was held in Portugal, which signalled the transformation of Portugal into a democratic regime (Rebelo Morais, 2020; Schmitter & Karl, 1991). However, one of the important indicators for strong full democracy is the time that has passed since the last transformation to full democracy. In other words, as time pass since the last transformation to full democracy, then the risk for reversal transformation is reduced. For example, a few East European countries were accepted as EU full members based on the assumption that they completed their transformation from a communist regime to full democracy, however, a few years later, has started a reversal transformation from a full democratic regime to a partial democratic regime, such as the case of Hungary and Poland (Baczynska, 2020; Mueller, 2014). Hence, previous regime types of a country and the period that passed since the last regime transformation may provide important indicators for the risk of regime transformation from a full democracy to partial democracy or worse to a repressive regime.

Repressive Regime. A repressive regime is equivalent to a regime without freedom. The literature includes various terms for repressive regimes, such as autocracy (Ang, 2018; Treisman, 2018; Tullock, 2012), dictatorship (Kendall-Taylor et al, 2020; Keremoglu & Weidmann, 2020; Kirchick, 2017; Schmitt, 2014; Wintrobe, 2000), totalitarianism (Gleason, 1997; Kamenka, 2017; Linz, 2000) and authoritarian (Ezrow & Frantz, 2011; Norris & Inglehart, 2019; Svolik, 2012; Von Soest & Grauvogel, 2017). Though all these terms represent regimes that restrict the rights of their citizens, either by a single leader (e.g. dictator) or by a group of leaders (e.g. Military junta). Hence, previous studies suggest that repressive regimes have the following characteristics (Ang, 2018; Gleason, 1997; Ezrow & Frantz, 2011; Kamenka, 2017; Kendall-Taylor et al, 2020; Kim & Kroeger, 2018; Kirchick, 2017; Linz, 2000; Norris & Inglehart, 2019; Schmitt, 2014; Svolik, 2012; Thyne & Powell, 2016; Treisman, 2018; Tullock, 2012; Von Soest & Grauvogel, 2017; Wintrobe, 2000): Firstly, an individual or a party or an elite political group has total power to manage the affairs of the country. Secondly, in a repressive regime, political pluralism is limited via restrictive laws that limit political parties, while opponents suffer from oppression and political persecution. Thirdly, a free general election does not take place, and even if it takes place, then it is not carried out democratically, and consequently, there is no change in leadership or government party. Besides, in many repressive regimes, the power is transferred from father to son or from the leader to a family member even if the regime is not an absolute monarchy, such as the leadership in Syria that was transferred from the father Hafez al-Assad to his son Bashar al-Assad (CNN, 2012), or as the case of Cuba that the leadership was transferred from Fidel Castro to his brother Raul Castro (Sullivan, 2007). Fourthly, decision-making is carried out by the leader and its loyal advisers or by the elite party, yet without ‘checks and balances’ nor transparency that exists in a full democracy. Fifthly, in a repressive regime, freedom rights are violated, particularly against opposition and journalism, while demonstrations, strikes and expressing opposition views are forbidden. Considering the above, a regime transformation from a democratic regime to a repressive regime can be the most chaotic transformation because it usually occurs via revolution or coup. For example, President Morsi was elected via the first historic democratic general election in Egypt that took place in 2012 (Al Jazeera, 2012), but a year later, Morsi was ousted via military coup by Sisi that served the Ministry of Defence under President Morsi (Wedeman et al., 2013). Following the coup, Sisi led the Rabaa massacre against hundreds of civilians that opposed the coup (Kingsley, 2014). Eventually, Sisi was elected as President of Egypt in 2014 via a controversial election, and since then Sisi rules Egypt as an autocratic leader (Rutherford, 2018; Fayazi & Dehshiri, 2020). Considering that, the expectation that a regime transformation to a repressive regime will increase the political risk, especially when it occurs following a coup.

Partial Democratic Regime. A partial democracy (Robinson, 2003; Sznajder & Roniger, 2003) is equivalent to a partly free regime. The literature mainly distinguishes between the characteristics of a full democratic regime versus a repressive regime as discussed above, despite that most regimes worldwide are de-facto considered as a partial democracy. According to Freedom House which monitors the degree of civil liberties and political rights worldwide, in 2020, 83 countries were considered as free regimes, 63 countries as partly free regimes, while 49 countries as not free regimes (Freedom House, 2020). Nonetheless, if we look in-depth at the rank of freedom house, then only 56 countries may be considered as full democratic regimes (85-100 points), while 88 countries may be considered as partial democratic regimes (35-85 points) (Freedom House, 2020). Thus, most of the countries worldwide are partial democratic regimes, rather than full democratic regimes. For example, according to house freedom, in 2020, Israel under Netanyahu has 76 points, while Brazil under Bolsonarmo has 75 points, so despite they being considered free regimes (Freedom House, 2020), they are de-facto partial democratic regimes and not full democratic regimes. Considering the above, a partial democratic regime is the common regime type that exists today worldwide, rather than a full democratic regime, or vice versa, a repressive regime. Importantly, a partial democracy can transform from a full democracy to a partial democracy, or vice versa, from a repressive regime to a partial democratic regime. The transformation from a full democratic regime to a partial democratic regime mainly occurs via changing a constitution or laws by a leader to get more power, such as the amendment that was done to the Russian constitution in 2020 that cancel the limit of four terms to allow Putin to stay as the president of Russia for six terms instead of four terms until 2036, while an additional amendment gives Putin the right to dismiss judges (Osborn & Balmforth, 2020). That is mean that Putin may serve as the president of Russia for over 36 years, from 2000 until 2036 with the ability to control the Russian court system, thereby, it signals the regime transformation of Russia. Even intention to cancel the limited terms of PM/President may indicate that the regime has started the transformation to partial democracy. For example, President Trump during his tenure has started to mull about the third term of the presidency under the argument that he is ‘entitled to it’ (Agerholm, 2018; Lord, 2019; Solender, 2020). Trump assumed that he would win the second term, so even in his first term, he started to plan how he will stay as the president of the USA longer than two terms. Besides, President Trump acted with his family members like ‘royal family’ by giving them significant roles, access to classified materials, and participating at high-rank meetings without the proper proceeding that requires from federal employees (Cassidy, 2018; CBC News, 2019; Sutton, 2017), while in his last hours as president, he even gave pardon for the father of his son in law, Kushner (MercoPress, 2020). Even takeovers on parliament by a leader may indicate a transformation from a full democracy to a partial democracy, such as the trying of PM Boris Johnson to shut down the UK House of Common for a long period to prevent MPs to pass a resolution against his government (Brown, 2019). This attempt was blocked by the UK supreme court that ruled that the suspension of parliament by PM Boris Johnson was unlawful (Shirbon & Holden, 2019). However, supreme courts in democracies are not always strong to block problematic leaders, so democracies are not always safe from regime transformation via appealing to a supreme court, such as the case of the Israeli supreme court that rejected an appeal against PM of Netanyahu that was given on the ground that Netanyahu can’t serve as a PM of Israel when he has a trial on crimes of bribe and breach of trust (Reuters, 2020), regardless of the convicted of his wife, Sara Netanyahu, that pleaded guilty in misusing public funds (The Hindu, 2019). Usually, in a full democracy, if a leader has a political scandal, then it immediately leads to impeachment or resignation, such as the case of the former president of South Korea, Park Geun-hye that impeached immediately when the abuse of power was revealed (Sang-Hun, 2016). Even, in Israel, in the pre-Netanyahu era, Olmert resigned as a PM of Israel when the investigation started and even before he was been formally indicted on fraud and breach of trust (BBC, 2012; Heller, 2008), while PM Rabin even resigned in his first term in 1977 due to a minor political scandal when it was revealed that he and his wife held foreign bank accounts in breach of Israeli law that was in that period (JTA, 1977). Thus, the new norm in Israel that PM can serve during a bribe trial may signal that the regime in Israel transformed from a full democracy to a partial democracy, regardless of the religious correction that is typical to a religious regime (Akerman, 2014). In light of the above, in partial democracy, the leader gets more power via changing the constitution and laws, especially regarding the ability to stay at the office of PM/President without limited terms. Hence, democracies that have a limited single term for PM/President like South Korea (Korea Assembly, 2012) or a maximum of two limited terms like the USA may have less risk for a regime transformation to a partial democracy compared to democracies without limited terms for PM/President. Nevertheless, any planning to cancel the limited terms for PM/President or to extend them (Solender, 2020) may signal that the full democracy has started the regime transformation to a partial democracy (Agerholm, 2018). Even though, a strong supreme court should be in a democracy to protect the trying to transform the regime from a full democracy to a partial democracy (Shirbon & Holden, 2019).

A Regime Type as a Crucial Location Factor of FDI Inward: Political Risk of Regime Transformation

The regime type and its level of freedom alongside its likelihood for a regime transformation at the country level affect the political risk of FDI inward in host countries. The literature suggests that democracies positively influence FDI inward (Asiedu & Lien, 2011; Escriba-Folch, 2017; Jensen, 2003, 2008; Li & Resnick, 2003), especially in the service sector, and in finance, insurance, and information activities, in particular (Kucera & Principi, 2014). However, democracy has less influence on FDI Inward in oil and minerals countries (Asiedu & Lien, 2011) and even a negative effect in mining, oil, and gas industries (Kucera & Principi, 2014). Doytch & Eren (2012) found that democracy positively impacts FDI in the agricultural and manufacturing sectors in Eastern Europe and Central Asia. Malikane & Chitambara (2017) found that democracy positively influences spillover from FDI Inward. Even Yang (2007) found that democracy impacts positively a higher level of per capita FDI in developing countries but does not influence the level of FDI nor FDI as a ratio to GDP. However, Li (2009) found that democracies encourage FDI when leaders face little political constraint yet with frequent leadership turnover, while autocracies encourage FDI when leaders face high political constraint yet stay in power for long.

The literature also suggests that repressive regimes are generally risky for FDI (Bastiaens, 2016; Francois et al., 2020; Tomashevskiy, 2017). Although, Bastiaens (2016) found that authoritarian countries can reduce the risk for FDI if they sign on international investment treaties, especially in cases that the country allows some degree of public policy deliberation. Bak & Moon (2016) even found that FDI reduced authoritarian leadership failure and even the likelihood of a coup by using FDI long-term to appease elite dissents and to buy off potential elite challengers. Tomashevskiy (2017) also found that increasing FDI in repressive regimes reduce the risk for a coup because paradoxically, investors send a larger amount of FDI to increase the peaceful patronage when the risk for a coup is high. Still, the study showed that an increase in FDI in the mining, oil and gas sectors may increase the likelihood of a coup (Tomashevskiy, 2017). Moon (2019) found that autocratic countries with legislatures attract more FDI than other autocratic countries. Francois et al. (2020) found that educated dictators with business experience attract more FDI compared to other dictators.

However, the literature suggests that exists a significant difference in the political risk for FDI Inward between communist regime versus absolute monarchy regime versus religious regime versus military regime, as follows. Firstly, the literature suggests that the remaining communist regimes worldwide are relatively politicly stable and even with a long positive trend of attracting FDI Inward, especially in China (Chen et al., 2020; Dullien, 2005; Fung et al., 2004; Jiang et al., 2013; Lau & Bruton, 2008), and Vietnam (Athukorala & Tien, 2012; Freeman, 2001; Xuan & King, 2008). Nonetheless, Cuba is set apart from other communist regimes in relation to FDI Inward because of the USA embargo (Gordon, 2012; Walsh, 2017). Importantly, despite that communist regimes lack political and freedom rights, paradoxically, the likelihood for a democratic revolution in the remaining communist regimes is significantly low. Nevertheless, these communist regimes may transform into a mixed economy in the long run, yet without a significant change in the communist political ideology. Given that, the expectation that the risk for FDI in communist regimes is low compared to other repressive regimes, despite the controversial communism ideology regarding political rights. Secondly, a religious regime type may have a mixed effect on FDI (Helble, 2007), yet the risk for foreign investors is low if the dominant religion is relatively big compared to other religions and secular groups in a natural way without religious coercion. From the FDI perspective, religion has a huge impact on the lifestyle, and consumption habits of its believers (Shyan Fam et al., 2004; Wach, 2016; Woodhead et al., 2016), so religious diversity plays a significant role in attracting FDI Inward (Dolansky & Alon, 2006). Thus, a lack of religious diversity amid religious coercion (Pinkkus & Meyer, 2008) may impact the scope of FDI Inward, especially regarding FDI market-seeking. Besides, the values and rules of the dominant religion influence the management methods and practices, (Li, 2008) alongside the work habits (Shyan Fam et al., 2004), so MNEs are required to adapt their working rules, products, and services to the requirements of the dominant religion in the host country. Hence, religious coercion may have a negative impact on FDI in terms of scope and risk, especially if the share of other religious and scholars in the host country is relatively big. In other words, resistance to religious coercion may increase the risk for FDI because it may lead to regime transformation via secular revolution. However, in most religious regimes, the share of the dominant religion is naturally big, so the likelihood for a regime transformation is low, such as in the cases of Saudi-Arabia (officially 100% Muslims) and Iran (99.6% Muslims) (CIA, 2021). Besides, in the case of Iran, the combination of the Muslim majority along with a partial democracy even significantly reduce the motivation for a regime transformation via a ‘secular-democracy revolution’. However, the motivation for a regime transformation via ‘secular-democracy revolution’ may be higher in the case of a religious regime that the share of minorities religious and seculars is too big to ignore, such as the case of Israel that the religious coercive may push for a regime transformation from a ‘partial democracy-religious regime’ to a ‘secular-full democratic regime’ because the share of Israeli Jewish religious among the total Israeli population is relatively small. More specifically, the share of Israeli non-Jewish religious is 25.7% (CIA, 2021), while the share of Israeli Jewish seculars (Hiloni) is 49% (Starr & Masci, 2016), so this share of 74.7% includes the Israeli non-Jewish religious and the Israeli Jewish seculars has the potential to create a regime transformation in Israel via ‘secular coalition’. In light of the above, in a religious regime exists a minor risk for FDI if the share of the dominant religion is relatively big. Conversely, a religious regime via religious coercion may restrict the scope of FDI and even increase its risk if the share of the minorities’ religious and seculars is relatively big to ignore in the host country. Thirdly, an absolute monarchy regime has a higher risk for FDI compared to a communist regime and a religious regime because an absolute monarchy regime is doomed for a regime transformation (Hoffman, 2015) either via transformation of constitutional monarchy (Barker, 1944; Gilmour, 1985) or via transformation of ‘republic revolution’ as happened to most of the absolute monarchy regimes in the last three centuries since the French revolution (Livesey, 2001). Nonetheless, a regime transformation can even occur via a ‘monarchy coup’ by another monarchy family member, mainly via assassination (Hoffman, 2015), such as what happened in Saudi Arabia when King Saud was forcibly ousted from the throne by his brother King Faisal that years later assassinated by his nephew (Wynbrandt, 2010). Nevertheless, FDI Inward has the potential for high profits in an absolute monarchy regime (Elimam, 2017; Shotar, 2005; Tabash & Dhankar, 2014) because of the lack of bureaucracy and competition that is typical for tenders in democracies. Still, it may involve a high risk for FDI, especially in a kingdom with a history of a ‘monarchy coup’, especially if it happened in the near past. Fourthly, a military regime is the riskier regime type for FDI Inward compared to other regime types, yet paradoxically, a military regime can provide the highest profits among all regime types because of the ability to get exclusive contracts based on bribe and corruption (Cheung et al., 2012; Gilbert & Sharman, 2016), especially in military regimes in Africa (Jalil et al., 2016; Teixeira & Guimaraes, 2015). Thereby, ethical, and illegal problems may increase the risk for FDI in military regimes (Holliday, 2005) due to the ‘norm of bribery’ (Habib & Zurawicki, 2002; Weiss, 2008), especially in Africa even in partially democratic regimes (Kochan, 2013; Nebehay, 2021). Besides, FDI in a military regime may also involve a ‘coup risk’ (Tomashevskiy, 2017) that can be carried out by a rival dictator or a military junta (Mahtani & Lynn, 2021). Despite the risks outlined above, many MNEs operate on a large scale in military regimes (Oneal., 1994; Tuman & Emmert, 2004) because of the ability to obtain exclusive contracts with high profits. Nevertheless, military regimes can change the laws, regulations, permissions, and restrictions overnight, and even cancelling licenses and contracts, which increases the risk for FDI due to concern that an exclusive contract or license will not survive for long in case of a regime transformation, especially via a coup by a rival dictator.

In light of the above, a regime type as a location factor of FDI Inward leads to a high correlation between risk and profitability. More specifically, a high risk of FDI is associated with the high profitability of FDI in a repressive regime, as well as in a partially democratic regime. Conversely, a low risk of FDI is associated with the low profitability of FDI in a full democratic regime. In other words, an FDI contract in a full democratic regime is based on competition to reduce prices, which decreases the profits, but at the same time, it reduces the risk for foreign investors due to the certainty of the trustworthy contract. Conversely, an FDI contract in a repressive regime is based in some cases on bribery and corruption, especially in military regimes, which increases the profits, but at the same time, it increases the risk for FDI due to the fear of chaotic regime transformation, especially via a coup.

Conclusions

This study explored the regime type as a location factor of FDI to predict the political risk for FDI Inward in a host country. Although, the FDI literature mainly focuses on political instability as a location factor of FDI over a regime type. However, political instability as a location factor of FDI allows knowing about the deterioration of political conditions (e.g. Internal and external conflicts) that were already occurred in the past in a host country (Aguiar et al., 2012; Burger et al., 2016; Godinez & Liu, 2018; Rafat & Farahani, 2019; Rashid et al., 2017; Rozen-Bakher, 2017; Samimi et al., 2011; Sethi et al., 2003), while a regime type as a location factor of FDI allows predicting the political risk for FDI that may occur in the FUTURE due to a regime transformation (Bak & Moon, 2016; Tomashevskiy,2017). Thereby, each regime type has different characteristics, level of freedom, and likelihood for a regime transformation, which may lead to a different level of political risk for FDI Inward. A regime transformation usually occurs suddenly without any pre-warning or visible indications, especially in cases of a military coup (Elumami & Laessing, 2019; Luttwak, 2016; Mahtani & Lynn, 2021; Sombatpoonsiri, 2017; Stoakes & Safi, 2021; Tendi, 2020; Thyne & Powell, 2016), and assassination (Hoffman, 2015). Though, even if exist signs of political unrest in case of revolution (Fishman, 2011 Takeyh, 2021), then still a regime transformation may happen suddenly without sufficient time for MNEs to adjust to the sudden change. Thus, from the viewpoint of decision-makers that deal with conducting FDI inward, the foremost factor is the risk of investment in the host country, especially due to a chaotic regime transformation that can lead to a total loss of investment, such as what happened to American firms during the communist revolution of Fiddle Castro in Cuba that led to a nationalization of assets of American firms (Domke, 1961).

To address the research objective, the study investigated the regime type at two layers of analysis namely, the characteristics of each regime type and its level of freedom to reveal the likelihood for a regime transformation that may risk FDI Inward. Hence, the study explored five regime types: democratic regime, communist regime, absolute monarchy regime, religious regime, and a military regime, while also investigating the implication of level of freedom via comparing full democratic regime, partially democratic regime and a repressive regime.

The analysis of the study indicates that exists significant differences between regime types examined in the study. Firstly, a democratic regime is less risky for FDI among all types of regimes yet exists a critical difference between a full democratic regime and a partially democratic regime regarding the political risk of FDI Inward. The common belief that a democratic regime has a low risk for a regime transformation, yet history has taught us that the worst dictator in modern history, Hitler, was raised to power not following a military coup or a revolution but through a long legal process that step by step overthrow the democracy of the Weimar Republic until he became a dictator when he succeeded to neutralise the parliament via a tactic of ‘state of emergency’ (Abel, 1986). Hence, a transformation from a full democratic regime to a partial democratic regime or even worse to a repressive regime does not occur ‘overnight’ as happened in a military coup but through legal manoeuvres via changing the constitution and laws to allow the dictator to stay permanently as the ruler of the country. That is done via cancelling the limited terms of the head of state alongside getting more power to choose, or vice versa, to remove high-rank public officers (Osborn & Balmforth, 2020). Given that, a full democratic regime that has a limited single term for the head of state (Korea Assembly, 2012) or a maximum of two limited terms (Lord, 2019) is less risky for a regime transformation to a partial democratic regime or worse to a repressive regime. Though any planning to cancel the limited terms for the head of state (Solender, 2020) may signal that the full democracy has started the transformation to a partial democracy (Agerholm, 2018). Nevertheless, a strong supreme court can be the guardian of democracy to prevent any trying to transform the regime from a full democracy to a partial democracy (Shirbon & Holden, 2019). All the same, one of the vital indicators for a strong full democracy is the time that passed since the last transformation to a full democratic regime. Secondly, a communist regime may also have a low political risk for FDI Inward due to the stronghold of the communist party in the remaining regimes. Hence, paradoxically, the likelihood for a regime transformation in the remaining communist regimes worldwide is relatively low, particularly via a democratic revolution, despite the lack of political rights in communism. That particularly applies to China which may be ‘too big to fall’. Nevertheless, the remain communist regimes may transform into a mixed economy in the long run, yet without a significant change in the communist political ideology. Thirdly, a region should be considered as a religious regime if the religious coercion significantly impacts the daily life of other religions and seculars through constitution and laws that give priority to the dominant religion. However, the political risk for FDI in a religious regime depends on the share of the dominant religion compared to the share of minorities religious and seculars. Thereby, the risk for foreign investors is low if the dominant religion is relatively big compared to other religions and secular groups in a natural way without religious coercion. Conversely, if the share of minorities’ religious and seculars is too big to ignore, then it may lead to resistance to religious coercion that may end in a regime transformation, resulting in political risk for FDI. Fourthly, an absolute monarchy regime is doomed for a regime transformation (Hoffman, 2015) via a transformation of constitutional monarchy (Barker, 1944; Gilmour, 1985), or republic revolution, or even via a ‘monarchy coup’ by another member of the royal family (Wynbrandt, 2010). However, FDI Inward has the potential for high profits in an absolute monarchy regime (Elimam, 2017; Tabash & Dhankar, 2014), but at the same time, it may involve a high political risk for FDI, particularly in a kingdom with a history of a ‘monarchy coup’, especially if it happened in the near past. Fifthly, a military regime is the riskier regime type for FDI Inward due to lack of an adequate justice system (Beech, 2021), yet paradoxically, a military regime can provide the highest profits because of the ability to get exclusive contracts based on bribes and corruption (Cheung et al., 2012; Gilbert & Sharman, 2016). Thus, FDI in a military regime may involve a ‘bribe risk’ (Cheung et al., 2012; Gilbert & Sharman, 2016; Teixeira & Guimaraes, 2015; Weiss, 2008) due to corruption norm in this kind of regime, as well as a ‘coup risk’ (Tomashevskiy, 2017) that can be carried out by a rival dictator or a military junta (Mahtani & Lynn, 2021), which may lead to a cancellation of FDI exclusive contracts that were made by the previous military ruler. Nevertheless, even, if a regime is currently a democracy, but suffered in the past from a military coup or ruled by a military dictator or a military junta, then exists the risk for a reversal regime transformation to a military regime (Devi, 2014; Mahtani & Lynn, 2021). Still, as time passed since the last military regime, then the risk is reduced for a reversal regime transformation to a military regime.

The study concluded that a high risk of FDI is associated with the high profitability of FDI mainly in repressive regimes, especially in military regimes and absolute monarchy regimes. Conversely, a low risk of FDI is associated with low profitability of FDI mainly in a full democratic regime. However, the study emphasized the need to strike a balance between risky regime type and high profits to reduce the political risk of FDI Inward due to the potential of chaotic regime transformation that may ignore the obligation to FDI contracts, or worse, it may lead to the nationalization of MNEs’ assets.

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Dr. Ziva Rozen-Bakher

Researcher in Risks for Foreign Direct Investment (FDI) and International Trade

Political Risks, Economic Risks, Strategic Risks

https://www.rozen-bakher.com/

PD5 - Research Paper. Rozen-Bakher, Z. A Regime Type as a Location Factor of FDI: Democracy, Communism, Absolute Monarchy, Religious Regime, and Military Regime

PD2 - Research Paper. Rozen-Bakher, Z. Are Multinational Enterprises’ (MNEs) Theories explained the reality of Foreign Direct Investment (FDI) and International Trade in the 21st Century?

PD6 - Research Paper. Rozen-Bakher, Z. Technological Location Factors of Foreign Direct Investment (FDI): R&D Expenditure, Technological Strategic Assets, Technical Labour, and ICT Infrastructure