Subnational Politics and Foreign Direct Investment (FDI): First Causal Evidence∗

Does the party of government influence the amount and type of inward foreign investment? The results of a number of correlational studies provide inconsistent evidence. However none of these studies for any level of government or any jurisdiction have used methods that allow them to speak to causal effects. The partisan differences of economic policy in the US are pronounced. Democratic administrations seek to promote growth through a consumption-driven approach, while Republican administrations tend to adopt an investment-driven growth strategy. The divergent growth strategies tend to create different business environments for foreign investors. We apply regression discontinuity (RD) methods to a set of narrow-margin US gubernatorial elections. Over the course of a four-year term the election of a Republican governor causes a 21% boost in the growth of manufacturing-oriented FDI stock, compared to a Democrat. This effect is robust to a series of challenges. However, the same approach provides no evidence that partisanship matters for the overall level of FDI.