Governance and Foreign Investment in China, India, and Taiwan: Credibility, Flexibility, and International Business

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Governance and Foreign Investment in China, India, and Taiwan Yu Zheng challenges the conventional wisdom that democracy is the prerequisite for developing countries attempting to attract foreign direct investment (FDI) and promote economic growth. While democracies provide more credibility than autocratic governments, democracies offer less flexibility than autocracies do. Zheng examines the relationship between political institutions and FDI through the use of cross-­ national analysis and cases studies of three rapidly growing Asian economies—­ in China, India, and Taiwan—­ with a focus on the role of a microinstitutional innovation known as a “special economic zone” (SEZ). China’s authoritarian system allowed for bold initiatives in launching radical economic reform, but its success in attracting FDI has been largely due to the increasingly credible investment environment as well as China’s central and local governments’ efforts to overcome constraints on investment. India’s democratic institutions provide more political assurance to foreign investors, but its market became conducive to FDI only when the government adopted investment policies that were more flexible. Taiwan’s democratic transition, which also shifted the combination of policy credibility and flexibility, was essential for the nation’s transformation of the investment climate during the periods of economic takeoff and sustained growth. In conclusion, Zheng finds that a more accurate understanding of the relationship between political institutions and FDI comes from careful analysis of institutional arrangements that entail a trade-­ off between credibility and flexibility of governance. Yu Zheng is Assistant Professor of Political Science at the University of Connecticut . Governance and Foreign Investment in China, India, and Taiwan Credibility, Flexibility, and International Business Yu Zheng The University of Michigan Press Ann Arbor Copyright © by the University of Michigan 2014 All rights reserved This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publisher. Published in the United States of America by The University of Michigan Press Manufactured in the United States of America c Printed on acid-­ free paper 2017 2016 2015 2014  4 3 2 1 A CIP catalog record for this book is available from the British Library. Library of Congress Cataloging-­ in-­ Publication Data Zheng, Yu, 1963–­ Governance and foreign investment in China, India, and Taiwan : credibility, flexibility, and international business / Yu Zheng. pages cm. —­(Michigan studies in international political economy) Includes bibliographical references and index. isbn 978-­ 0-­ 472-­ 11904-­ 2 (cloth : alk. paper) —­isbn 978-­0-­472-­02957-­0 (e-­book) 1. Investments, Foreign—­ China. 2. Investments, Foreign—­ India. 3. Investments, Foreign—­ Taiwan. 4. China—­ Politics and government—­ 21st century. 5. India—­ Politics and government—­ 21st century. 6. Taiwan—­ Politics and government—­ 21st century. I. Title. hg5782.z47195  2013 332.67'30951—­dc23 2013035568 In memory of my late father, Zheng Xueliang ...