The impact of electoral uncertainty on the attraction of greenfield FDI and the moderating role of economic freedom

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The impact of electoral uncertainty on the attraction of

greenfield FDI and the moderating role of economic

freedom

Student: Petros Daras Student number: 11199393 1st Supervisor: Erik Dirksen, MSc 2nd Supervisor: Dr. Ilir Haxhi Date: 25/01/2017

Faculty: Economics & Business

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Statement of Originality

This document is written by student Petros Daras who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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3 Abstract

As the competition among countries to attract FDI increases, the importance of the political environment as a determinant of investment becomes even more significant. Prior research investigates how the uncertainty surrounding national elections influences FDI flows by either focusing on total FDI flows or solely on M&A. However, existing literature has paid little attention to the impact that electoral uncertainty has on the decisions of MNEs regarding the location of their foreign wholly-owned subsidiaries. In this study, we address this gap by examining whether electoral uncertainty affects greenfield FDI inflows. Using asample of 133 elections in 51 countries between 2003 and 2015 we show that there is no significant decrease in the average value and number of greenfield FDI projects that countries attract during electoral years. Furthermore countries’ level of economic freedom does not seem to have a moderating effect on the examined relationship. Nevertheless, results indicate that post-electoral uncertainty negatively influence the attraction of highly valuable investments in countries with 5-year election cycles and that the effect of electoral uncertainty on greenfield FDI does not depend on the government system of countries. These findings contribute to the IB and political literature and highlight new avenues for future research on the interaction between the political

environment of countries and their ability to attract foreign investments.

Key Words:

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1. Introduction

Globalization and the liberalization of international trade have created many investment opportunities for companies to expand their operations into foreign countries and as a result the growth of the global foreign direct investment (FDI) over the past decades has been remarkable. Multinational enterprises (MNEs) are directly investing in host countries by either establishing wholly-owned subsidiaries, a type of FDI called greenfield investment, or by acquiring or merging with existing enterprises in the target markets (M&A) (Nocke & Yeaple, 2007). The cross-border M&A boom of the late 1990s and early 2000s lead a big part of the recent international business (IB) literature to focus on M&A while greenfield investments receive much less attention. However empirical evidence from several studies (e.g. Wang & Wong, 2009; Žilinskė, 2010; Harms & Méon, 2012) show that greenfield FDI is the most beneficial type of FDI for the economic development of national economies something that justifies the intense competition among countries to attract these investments in their territory (Burger, Van Der Knaap & Wall, 2013). In this study, we examine how the uncertainty caused by national elections can influence the attraction of MNEs’ greenfield investments which is a relationship that remains unclear in the IB literature. The importance of greenfield investments for both MNEs and national economies and the consensus that exists among scholars that these investments are very sensitive to various institutional aspects make this research relevant for both theory and practice.

There are many factors influencing the investment decisions of MNEs and the IB and economics literature has a long tradition in analyzing the determinants of FDI. One of the most important determinants of FDI is the institutional environment of countries since institutions are considered the “rules of the game” and they are responsible for reducing uncertainty and creating

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6 order in exchange (North, 1991). Most empirical studies show that institutional quality has a positive and significant impact on FDI levels and that institutional aspects like government stability, property rights and legal systems are all affecting MNEs’ investment location decisions. Nevertheless, each type of FDI has diverse characteristics that make it more sensitive to different aspects of the institutional environment (Ionascu, Meyer & Erstin, 2004). Greenfield investments are more sensitive to institutional aspects such as corruption (Ayca, 2012), differences in tax rates (Hebous, Ruf & Weichenrieder, 2010), financial stability (Byun, Lee & Park, 2012) and laws regarding intellectual property rights (Nagano, 2013) compared to M&A. All these aspects are closely related to the governments of countries and for that reason, an MNE that plans to establish a wholly-owned subsidiary in a foreign market needs to monitor the country’s political environment as well as the changes that occur in it.

The political environment of a country represents one of the most unpredictable elements of the business environment and many scholars consider political uncertainty as a significant institutional aspect that directly influences investment flows. Institutional processes like national elections constitute major sources of unpredictability and uncertainty in political environments since their outcomes have several implications for economic and regulatory policies such as taxation, capital controls and industry regulations. Due to the importance of these policies for the operations of MNEs many recent studies try to empirically examine the relationship between electoral uncertainty and FDI flows. Cao, Li and Liu (2015) suggest that the uncertainty

surrounding national elections affects the volume and the outcome of cross-border acquisitions, Julio and Yook (2014) report that this electoral uncertainty leads MNEs to postpone their investments abroad while Lee (2014) notes that the volume of cross-border M&A between two countries decreases before elections in the target country and this decline varies for different

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7 industries. The aforementioned studies investigate the relationship between electoral uncertainty caused by elections and FDI flows by either focusing on total FDI flows or solely on M&A activity. Existing literature has paid little attention to the impact that electoral uncertainty might have on the decisions of MNEs regarding the location of their greenfield foreign investments. Thus, this study addresses the following research question:

RQ1: Does electoral uncertainty in target countries influence MNE’s greenfield FDI projects?

In order to better understand this interaction it is important to also take into consideration the economic environment of countries and more specifically their level of economic freedom. Economic freedom is considered by economists as a central pillar of a country’s economic and institutional structure which can have implications for both FDI and electoral uncertainty. Several scholars such as Dunning (2002) and Heckelman (2000) suggest that economic freedom is an important determinant of FDI, something that is also supported by the empirical evidence of many studies (e.g. Kapuria & Foreman, 2007; Caetano & Caleiro, 2009; Naanwaab &

Diarrassouba, 2016). Furthermore, previous research shows that a country’s level of economic freedom can influence the effect of electoral uncertainty on economic conditions like the stock market (Pantzalis, Stangeland & Turtle, 2000) and in general affect the degree of uncertainty in the political environment (Balassa, 2013). Because of the importance of economic freedom for both uncertainty and FDI it is possible that variations in its levels might affect the strength of the relationship between electoral uncertainty and the attraction of greenfield FDI projects. However these interactions have not been investigated by previous studies, leaving a research gap in the IB literature which we aim to address in this research. Consequently, the second research question of this study is the following:

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RQ2: To what extent is the relationship between electoral uncertainty and greenfield FDI projects moderated by a country’s level of economic freedom?

The purpose of this study is to investigate whether national elections and the uncertainty they cause have an impact on the establishment of wholly-owned subsidiaries by MNEs in foreign countries that are hosting the elections and if this relationship is moderated by the country’s level of economic freedom. In order to test the research questions, several hypotheses will be developed. These hypotheses will be tested using an explanatory quantitative analysis of 113 elections in 51 countries between 2003 and 2015. After coding the variables, separate one-way Analyses of Covariance (ANCOVAs) and the Process macro for SPSS will be used to analyze them. The findings of the research will help us answer the aforementioned research questions.

This study contributes to the existing literature regarding FDI flows and the political environment of countries by shedding light on the unexplored relationship between electoral uncertainty and greenfield FDI as well as by investigating the role that economic freedom plays in this relationship. Addressing these research gaps can enhance our knowledge regarding the political and economic factors that influence the attraction of FDI into countries and identify promising areas for future research in the field. This study contributes also practically by helping the managers of MNEs to increase their understanding of the institutional context of target countries so they can improve the management of their foreign subsidiaries as well as their location decisions regarding the establishment of these subsidiaries. In addition, the results of this study may be used by government officials in order to better anticipate and handle the impact of political events such as elections on the national economy of their country.

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9 The structure of this study is the following: first, the study provides a literature review on the major concepts concerning our research such as FDI, greenfield investments, institutional environment, electoral uncertainty and economic freedom. Then the theoretical framework of the study containing the research questions and hypotheses is presented. Subsequently in chapter 4 the methodology of the study is explained followed by chapter 5 which presents the results of the statistical analysis. Chapter 6 provides a discussion of the results and outlines the limitations and implications of the research alongside some future

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2. Literature review

2.1 Foreign Direct Investment

The world economy is steadily becoming more integrated due to technological progress in transportation and communication and because of the phenomenon of globalization which increases worldwide interactivities. One of the most visible drivers of globalization is cross-border investments (Görg & Greenaway, 2004). These kinds of investments have grown rapidly in size in recent decades and they represent a big part of the GDP of many countries around the world (Julio & Yook, 2014). On average, since 1990 global FDI flows grew by approximately $50 billion per year, which represents an annual increase of 7.6 percent (Milner, 2014). A more common term that is used to describe cross-border investments is bilateral foreign direct

investment (FDI). Despite the increasing interest of international business (IB) research in FDI and the significant importance it has for both national economies and MNEs, there is still no consensus on its definition.

According to the Organization for Economic Cooperation and Development (OECD), “direct investment is a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor”

(OECD, 2008). However there are many different definitions of FDI in the international business literature. Farrel (2008) defines FDI as a combination of technology, management,

entrepreneurship and capital that allows companies to operate in foreign markets. According to Moran (2012), FDI refers to the establishment of a business operation, in the form of a joint venture, acquisition or wholly-owned subsidiary, in one country from a corporation based in another country. Other scholars define FDI as the ownership or control of 10 percent or more of

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11 the voting securities of a nonresident enterprise, or the equivalent interest in the case of an

unincorporated entity (Griffin & Pustay, 2007). Regardless of the definition used, there is consensus in the IB literature that FDI takes various types and forms.

From a theoretical standpoint, FDI can be classified as vertical or horizontal (Almfraji & Almsafir, 2014). An MNE which invests in a foreign country in the same business like the one that it operates domestically, producing the same products or services, represents an example of horizontal FDI (Aizenman & Marion, 2003). On the other hand, a vertical FDI occurs when an MNE locates different stages of the production in different countries, based on the level of cost in each country (Aizenman & Marion, 2003). Besides the distinction between horizontal and vertical, FDI can also be categorized based on the type of the investment. A foreign firm that undertakes direct investment in a host country can either build its own establishment in that country or acquire or merge with an existing enterprise in the target market (Nocke & Yeaple, 2007). In the former case FDI takes the form of a greenfield investment which involves mainly newly-created assets that the foreign company controls in the host country, while in the latter case FDI takes the form of a merger or acquisition (M&As) where existing assets are transferred from local firms to the MNE (Calderón, Loayza & Serven, 2004). Due to the M&A boom of the late 1990s and early 2000s a big part of the recent international business literature is focusing on M&As while greenfield investments receive much less attention despite their significance for both MNEs and national economies.

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2.1.1 Greenfield FDI

Modes of entry are difficult to change once established because of the long-term

consequences they have for the MNE and for that reason the selection of the right way to enter a foreign country is of critical importance for the firm (Brouthers & Hennart, 2007). The choice of a greenfield investment as an entry mode, depends on many factors like the intensity of the competition and the structure of the market where the investment is made (Müller, 2007). In the hierarchical model of market entry modes, Pan and Tse (2000) suggest that there are different factors affecting the choice of entry modes in different levels of hierarchy with macro-level factors influencing the choice between equity and non-equity and micro level factors like contract terms, distribution channel and human resources issues influencing the choice between greenfield investments and other modes of entry. Taking into consideration these micro level-factors many MNEs choose to enter foreign markets by establishing a new subsidiary from scratch.

Greenfield investments differ from other forms of FDI in many aspects. In their study, Newburry and Zeira (1997) argue that greenfield investments differ from mergers and

acquisitions in several ways, such as in terms of equity ownership, financial risk, speed of results and number of owners. Wang and Wong (2009) state that greenfield investments rely more on the internal organization and the resources of the MNE compared to M&As where the internal organization of the firm is expanded through the external market trading. Greenfield investments might require a lot of time and capital but they also have important advantages compared to other forms of FDI. The establishment of a subsidiary in a foreign country by an MNE makes the transfer of knowledge between the parent firm and the subsidiary easier, facilitates the formation of a common organizational culture, provides an option for further expansion in the future as

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13 more information about the market becomes available and also requires lower upfront

investments in comparison with an acquisition (Brouthers & Dikova, 2010). However, greenfield investments can be beneficial not only for the MNE but also for the host country that is the destination of those investments.

Many studies in the economic and international business literature focus on the importance of FDI for the development of host countries (Azman-Saini, Baharumshah & Law, 2010). Most of these studies suggest that greenfield investments represent the most beneficial type of FDI for the economic growth of the countries that constitute investment destinations. In their study, Wang and Wong (2009) investigate whether greenfield FDI and M&As have an asymmetric growth impact on host countries based on data from 84 countries. Their findings indicate that greenfield investmnents exert a significantly positive growth effect compared to the negative one of M&A. Neto, Brandão and Cerqueira (2010) show that both developed and developing

countries benefit from greenfield investments in terms of economic growth in contrast with M&As that have a negative impact on the economic growth of developing countries and

insignificant on developed countries. In his theoretical framework regarding the measurement of welfare effects of inward FDI, Žilinskė (2010) concludes that greenfield FDI has greater positive externalities compared to M&A. Research by Harms and Méon (2012) also supports that

greenfield FDI has a much stronger growth effect, relative to GDP, than the growth effect of M&A sales.

Greenfield investments can contribute to the development of host countries in many

different ways. Kim (2009) argues that greenfield FDI increases the productivity and the capital formation of the countries where the MNEs establish their subsidiaries. Neuhaus (2006) states that MNEs which establish their operations abroad through greenfield investments directly

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14 increase the level of technology of the host country by employing new production technologies. In their study, Balcerzak and Zurek (2011) claim that attracting greenfield FDI should be the priority of government policy as the spillover effects of these kind of investments, especially in high tech industries, improve the economic situation of a country in the long term. Furthermore greenfield investments generate new employment and increase the number of firms in the market preventing at the same time a rise in the market concentration (UNCTAD, 2000). The

aforementioned benefits of greenfield FDI, explain the intense competition among countries to attract these type of investments in their territory (Burger, Van Der Knaap & Wall, 2013). In order to accomplish that, many countries focus on improving their political and institutional environment which is one of the most important determinants of FDI flows to a country (Kostevc, Redek & Sušjan, 2007).

2.2 Institutional environment

Changes in the global competitive landscape in recent years have increased the importance of countries’ institutional environment for the international strategies of MNEs (Hitt, 2016). International business research has long recognized institutions as a major driver of firms’ international strategy (Peng & Khoury, 2009). However it was the emergence of the institution-based view as one of the three leading perspectives in IB strategy, alongside the resource-institution-based view and the industry-based view that placed institutions at the core of many studies in the field (Peng, 2006). Many scholars have examined the concept and the role of institutions as well as their interactions with MNEs. The two most commonly used definitions of institutions in the IB literature belong to North (1990) and Scott (1995). North defines institutions as “the humanly devised constraints that structure human interaction” while Scott describes them as the

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15 to social behavior” (North, 1990; Scott, 1995). In terms of their nature, institutions can either be formal, like governments, laws and contractual terms or informal like social norms and cultural values (Zenger, Lazzarini & Poppo, 2001). Institutions are considered the “rules of the game” (North, 1990) and they affect MNEs activities in multiple ways.

The most significant way in which institutions influence the strategies of MNEs is through their main function which is to reduce uncertainty and create order in exchange (North, 1991). In order to achieve that, institutions rely on their capability of shaping the behaviors of many actors such as individuals, firms and non‐governmental organizations (NGOs) by clearly defining what is considered legitimate (Peng & Khoury, 2009) and by providing a stable framework

responsible for the formation of ethical expectations regarding the way participants behave in a transaction (Baker & Riddick, 2013). By doing so, institutions also reduce the cost of

transactions (Meyer, 2001) since the two key sources of transaction costs identified in the literature are the cost of contract negotiation and the uncertainty concerning the behavior of trading partners (Eggertson, 1990). Besides reducing uncertainty and transaction costs the institutional environment can facilitate business by providing the necessary infrastructure in terms of communication, transportation and market facilities (Hallberg, 2000), by promoting business-friendly economic policies (Gillanders & Whelan, 2010) by reducing entry barriers (Burger, Van Der Knaap & Wall, 2013) and by helping MNEs improve their firm-specific advantages (Dunning, 1998). Due to the importance of the institutional environment for the operations of MNEs, institutions have received a lot of attention in the IB literature, with many scholars focusing on the impact they have on FDI.

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2.2.1 Institutions and FDI

A large body of literature in the IB field examines the relationship between FDI flows and host countries’ institutional environment. The majority of the studies show that institutional quality has a positive and significant effect on FDI levels (e.g. Anghel, 2004; Daude & Stein, 2007; Masron & Abdullah 2010) while there are few that report no considerable effect (e.g. Noorbakhsh et al. 2001; Asiedu 2002). According to Busse and Hefeker (2005) government stability, basic democratic rights and the absence of ethnic tensions and internal conflicts are positive and significant determinants of FDI. Li and Resnick (2003) report that institutions can affect FDI both positively (through the improvement of property rights) and negatively (by imposing constraints on policies of the host country). Asiedu (2005) shows that FDI is attracted by countries with political stability, reliable legal systems and low levels of corruption while the study of Meon and Sekkat (2004) in 107 countries points out that political risk has a negative impact on FDI. Despite the existence of studies that fail to identify a robust effect of institutions on FDI (Noorbakhsh et al. 2001; Asiedu 2002), mostly because they are based on small samples and on indicators that are not key institutional determinants of investment (Ali, Fiess &

MacDonald, 2010), most studies support the idea that foreign investors pay a lot of attention on institutional quality of countries when they have to select an investment location.

Institutional quality might play a significant role in attracting FDI, but not all aspects of the institutional environment are equally important for the different strategies of MNEs. Each type of FDI has diverse characteristics and for that reason different types of FDI projects are more sensitive to different aspects of the institutional environment (Ionascu, Meyer & Erstin, 2004). According to the findings of the study of Hebous, Ruf and Weichenrieder (2010), greenfield investments are more sensitive to differences in tax rates compared to M&A. In their study,

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17 Arslana and Larimoa (2011) observe that high informal institutional distance and high host country risk lead MNEs to choose greenfield investments instead of acquisitions. The findings of Teixeira and Grande (2012) show that corruption discourages greenfield investments something which is also supported by Ayca (2012) who points out that corruption affects more the

establishment of wholly-owned subsidiaries in comparison with other types of FDI. Furthermore Byun, Lee and Park (2012) report that the financial stability of host countries has a positive effect on greenfield FDI compared to a negative one on M&A and Nagano (2013) notes that MNEs tend to rely more on greenfield investments rather than cross-border M&A when institutions of the host country adequately enforce laws regarding intellectual property rights. The aforementioned institutional aspects which are particularly important for the establishment of wholly-owned subsidiaries by MNEs are all closely linked with the political institutions of countries and for that reason institutional processes that influence the political uncertainty and stability in a country like national elections might be momentous occasions that affect the attraction of greenfield investments.

2.2.2 Political uncertainty, national elections and FDI

In the contemporary world one of the main features that investors regard as extremely important when they establish their business in a foreign market is the degree of the political stability and uncertainty of the country in which they are planning to invest (Shahzad et al. 2012). Several scholars in IB literature consider political risk and uncertainty as one of the most significant institutional aspects which directly influence the flows of FDI into countries.

Empirical evidence from various studies (e.g. Desai et al., 2008; Julio & Yook, 2012) shows that political uncertainty leads to a reduction of aggregate investments because it increases the risk of the investments and ultimately affects their total value. Due to the irreversibility and the high

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18 costs of reversing FDI, high political uncertainty in a country leads to a greater risk of policy reversal which makes investors reluctant to commit themselves to market entry (Bak, 2016). Even though there are few studies that find no relationship between political risk and FDI inflows (e.g. Singh & Jun, 1995; Wheeler & Mody, 1992), the vast majority of empirical findings show that political instability and uncertainty are significant factors in affecting the investments a country attracts (e.g. Schneider & Frey, 1985; Tuman & Emmert, 2004; Solomon & Ruiz, 2012). Since political stability is necessary for the achievement of economic growth (Shahzad et al. 2012) countries rely on their governments to reduce political uncertainty by creating a stable economic and political environment.

Governments play a central role in the formation of the institutional environment of countries as they create the rules and frameworks in which both domestic and foreign firms are able to operate and compete. Political factors like bureaucracy, level of corruption, employment laws, competition regulations and tariffs are major criteria for the international location decisions of companies (MacCarthy & Atthirawong, 2003) and they are all affected by the actions and decisions of governments. These governmental actions and policies can either work as incentives for MNEs to invest in a specific country or they can hinder FDI by creating financial and non-financial barriers. For example Chen (2007) reports that tax incentives can help countries attract more foreign investments while Görg, Molana and Montagna (2009) show that public spending is positively related to FDI inflows. On the other hand studies like the one of Njoroge and Okech (2011) and Li and Resnick (2003) argue that governmental policies such as the bureaucratic screening of foreign investors and strong antitrust regulations can negatively affect the attraction of FDI in a country. Overall, the political environment represents one of the most unpredictable elements of the business environment and for that reason it has become essential for MNEs to

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19 monitor events like national elections which can affect the composition of governments in

countries where they want to invest and in countries where they have already invested.

National elections represent the political processes that are responsible for some of the biggest changes in the political and institutional environment of democratic countries. The election of a new government has tremendous implications for the way a country is being

governed and as a result the political uncertainty is higher in periods of elections, something that is supported by the empirical evidence of several studies (e.g. Bialkowski, Gottschalk &

Wisniewski, 2008; Boutchkova et al. 2012; Bak, 2016). For example, Mei and Guo (2004) observe that stock markets are more volatile during election years while Boutchkova et al. (2012) note that the cash flows of industries which are politically-sensitive are more unpredictable during elections. Bialkowski et al. (2008) also document the greater volatility of market indexes in election periods and Bernhard and Leblang (2006) find evidence that changes in exchange rates, bond yields, and equity volatility are larger and have less predictable outcomes during elections compared to other periods. In general, the literature supports the idea that an election serves as the most apparent turning point in a democratic country, around which there is greater political uncertainty compared to other times (Bak, 2016). This increased political uncertainty and the multiple consequences that elections have on economic and regulatory polices is a central concept in many influential political theories, such as the political business cycle theory, that focus on the various effects elections have on the economy of countries.

The main concept behind the political business cycle is that incumbent politicians try to manipulate the economy in the pre-election period by promoting expansionary monetary and fiscal policies which are popular among voters (Nordhaus, 1975). This opportunistic behavior is based on the idea that people tend to reward short-term macroeconomic performance and for that

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20 reason incumbent governments try to benefit from this myopic attitude by implementing policies aiming to reduce unemployment and attract investments shortly before elections in order to re-elect (Nordhaus, 1975). Empirical evidence on the main hypothesis of the political business cycle that economic activity increases right before an election has been mixed. Studies like the one of Cole (2009) observe a rise in economic activity before national elections while other studies like the one of Drazen (2001) find no evidence of such a relationship. A more recent alternative of the political business cycle is the electoral business cycle which suggests that as elections draw closer, macroeconomic performance should decrease in certain parts of the economy because of the policy uncertainty surrounding the elections (Canes-Wrone & Ponce de Leon 2014). According to this approach in the face of electoral uncertainty investors prefer to delay costly and irreversible investments something which is in agreement with the findings of Julio and Yook (2012) and Canes-Wrone and Park (2012). Besides the business cycle theories, another influential theory that focuses on the importance of the electoral uncertainty for the economic environment is the Partisan Theory of macroeconomic policy (Hibbs, 1977).

The main idea behind the Partisan Theory is that political parties consider nominal and real economic performance in different ways due to their contrasting political ideologies something that increases the electoral uncertainty (Hibbs, 1977). In particular, Hibbs suggests that socialist governments have a stronger tendency to undertake extensive policies designed to lower the levels of unemployment and boost economic growth compared to conservative ones, but at the same time these policies might also increase the risk of inflation in the economy (Hibbs, 1994). Therefore, a change in government from the right to the left is expected to produce a short-term unexpected inflation rise while temporarily increasing economic output and employment levels (Canes-Wrone & Ponce de Leon 2014). The Rational Partisan Theory developed by Alesina

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21 (1987) represents an extension of Hibbs’ Partisan Theory, which not only assumes that different political ideologies lead to different macroeconomic outcomes, but also supports the idea that all elections involve some uncertainty about the winning party that directly affects the behavior of individuals. More specifically, the Rational Partisan Theory states that if people rationally expect ideological differences between parties to affect inflation, employment and growth then they adjust their economic behavior before each election with regards to changes in the probability that each party has to win (Fowler, 2006). In this way the uncertainty regarding future

governmental policies is considered temporary because it is expected to be significantly lower once the results of the elections are known (Fowler, 2006).

Even though the Rational Partisan Theory is among the most cited theories in the political field, the fact that it focuses solely on pre-electoral uncertainty and does not take into account the possible unique implications that post-electoral uncertainty might have, limits its explanatory power. Fowler (2006), Julio and Yook, (2012) and many other scholars argue that even when the electoral outcome is known, some degree of uncertainty still exists concerning the economic policies that the newly elected government is going to implement. In other words, political uncertainty increases before, during and after national elections and for that reason electoral years are considered as the most politically and economically uncertain years for the

environment of countries (Bialkowski et al., 2008; Mei & Guo, 2004). This rise in the political uncertainty during election years is highly relevant to FDI decisions because of the numerous implications it has for economic and regulatory policies that are considered crucial by investors such as taxation, industry regulations, trade policies, capital controls and fiscal policies (Julio & Yook, 2012). Due to the significant role elections play in shaping a country’s economic and

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22 business environment there is considerable interest among IB scholars regarding the relationship between electoral uncertainty and FDI flows.

Many recent studies examine how the uncertainty surrounding national elections affects investments in countries with the vast majority of the empirical findings showing that there is an adverse effect of electoral uncertainty on FDI. According to Cao, Li and Liu (2015) the political uncertainty related to national elections has a negative impact on the volume and the outcome of cross-border acquisitions. They also find that elections in target countries discourage MNEs’ inbound acquisitions while elections in home countries encourage MNEs to acquire targets abroad. Julio and Yook (2014) show that the uncertainty surrounding election outcomes leads MNEs to postpone investments abroad until the uncertainty is reduced. By examining the flows of FDI from parent firms located in the United States to their subsidiaries in 43 countries they find that FDI flows drop by roughly 13% during election years and that this relationship is moderated by the institutional quality of the target country. Another one of their findings was that the negative effect of policy uncertainty on FDI flows has a larger magnitude around elections which are characterized by close outcomes and more competition. Lee (2014) also observes that the volume of cross-border M&A between two countries decreases during election periods in the target country and this decline varies for different industries. In particular Lee finds that during electoral years, firms in more complex industries with a higher dependence on government spending have a lower chance of being acquired by foreign MNEs.

Other studies like the one of Julio and Yook (2012) also empirically confirm the decrease in the investments in election years. Using a sample of 248 national elections in 48 countries Julio and Yook show that companies cut down investment expenditures by approximately 4.8% compared to non-election years, with the reduction in investments being greater for more

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23 unpredictable electoral outcomes. Along the same line Jens (2016) notes a decline in investments in the face of electoral uncertainty in his study about gubernatorial elections and investments in the United States. He shows that states attract fewer investments in election years compared to other years and he also identifies some firm characteristics that make firms more susceptible to higher electoral uncertainty such as greater political sensitivity and high disinvestment costs. According to other scholars such as Brogaard and Detzel (2015) and Pastor and Veronesi (2013) electoral uncertainty makes investors more prone to request a risk premium due to the higher total risk of their investments. Most of these studies examine the relationship between electoral uncertainty and investments by either referring to total FDI flows, subnational investments or by focusing solely on M&A. However, the literature has paid little attention to the impact that electoral uncertainty might have on the establishment of wholly-owned subsidiaries by MNEs in foreign countries that are hosting elections. Based on that we can address the following research question: Does electoral uncertainty in target countries influence MNE’s greenfield FDI

projects?

The aforementioned question represents a research gap in the IB literature as it has not been addressed by previous studies in the field. Due to the critical role that the institutional

environment plays in the attraction of greenfield FDI, it is both interesting and academically relevant to examine the unexplored relationship between electoral uncertainty and greenfield investments. In order to better understand this interaction it is necessary to also take into account the economic environment of countries and more specifically the degree of their economic freedom. Economic freedom is considered by economists as a central pillar of a country’s economic and institutional structure and due to its importance for both uncertainty and FDI it is

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24 possible that its variations might affect the strength of the relationship between electoral

uncertainty and the attraction of greenfield investments.

2.3 Economic freedom

The concept of economic freedom is far from new in economic theory. Since the 18th

economists have regarded economic freedom as a natural right that is crucial for the achievement of economic progress and the improvement of welfare (Piątek, Szarzec & Pilc, 2013). Adam Smith was one of the first economists to mention the importance of freedom in the economy. In his prominent book, "The Wealth of Nations", he focused on the importance of economic freedom by illustrating how the invisible hand of the market increases the wealth of nations (Madan, 2002). Along similar lines, David Ricardo also supported the idea that free trade can contribute to economic growth while Milton Friedman stated that economic freedom is the most productive method of controlling economic activity (Madan, 2002). Despite the great deal of attention this concept has received, there is still no general agreement among scholars concerning its definition. As a result of this lack of consensus, several definitions of the concept exist.

Gwartney et al., (1996) define economic freedom as the situation where individuals can acquire property, which is protected by others’ invasion, without stealing or using fraud and force. Furthermore, they add to the definition that the owners of the property are free to use, give or exchange it among themselves as long as they do not violate the rights of others.

The Fraser Institute gives a different definition of economic freedom by focusing more on the extent of government interference on the economic activity that any member of a society can pursue. One of the most comprehensive definitions of economic freedom and the one that this research focuses more on is the definition of the Heritage Foundation. According to this,

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25 economic freedom is "the fundamental right that every human has to control his own property and labor. In a society which is economically free, individuals are free to decide about their own employment, production, investment and consumption in any way they please. In this society, governments allow the free movement of labor, goods and capital, and avoid the constraint of liberty beyond the extent necessary for the protection and maintenance of liberty itself" (O'Driscoll, Feulner & O'Grady, 2001). From the definitions it becomes clear that economic freedom is a multifaceted concept and that makes its quantification a challenging process. Due to the complex nature of the concept, ambitious attempts from organizations such as the Fraser Institute and the Heritage Foundation to address this challenge focus on breaking down the concept into several broad factors like legal structure, size of government, trade freedom,

investment freedom and many other sub factors which are all affected by governmental decisions and they ultimately influence the level of freedom in an economy.

The role of government is central in the economic freedom concept as it can use fiscal and regulatory policies to either promote or limit the freedom in an economy. Governments that want to promote economic freedom in a country, focus on the protection of property rights and the enforcement of contracts through the provision of an effective legal structure and a strong law-enforcement system (Lawson, 2008). In addition, they also avoid to seize people’s property and to interfere with the free exchange of goods and services and the freedom that people have to enter and compete in product and labor markets (Lawson, 2008). In contrast, governments that want to reduce the level of freedom in an economy undertake restrictive policies such as

anticompetitive regulations, higher taxation and restrictions that aim to limit or make harder the entry into business activities (Madan, 2002). Anticompetitive regulations for example distort supply and demand in markets by altering the relative costs that different producers face while

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26 higher taxes reduce the overall activity in the private sector as they decrease individuals and firms’ ability to pursue their economic goals. These two different strategies that governments can use in order to alter the level of economic freedom in a country have their sources in the

immense intellectual debate that has been going on for a very long time in the economic world.

On the one side of this debate are the economists and philosophers such as Adam Smith, David Ricardo, John Stuart Mill and Milton Friedman who are ardent supporters of an economic system which is established on private property and free markets (Lawson, 2008). According to them, economic freedom is a necessary condition for the achievement of a sustainable human and social development because freer markets lead to higher productivity and public prosperity in a society. On the other side, scholars like Karl Marx, Michael Harrington and John Kenneth Galbraith, advocate an economic system where there is centralization of economic decisions and economic planning and where the role of state in the economy is expanded (Lawson, 2008). These scholars are hostile to economic freedom because they consider free markets as a source of economic problems such as monopolies, income inequality, and recurring economic crises. According to them the economy is too important to entrust to individuals’ decentralized decisions and the problems of the markets can only be solved through a centralized political system that controls the economic lives of people (Lawson, 2008). These two different approaches have inspired many scholars to study the importance that economic freedom has mainly for macroeconomic but also for microeconomic conditions. As a result there are hundreds of peer-reviewed articles in the economic and IB research that empirically examine the effect of economic freedom on different variables such as economic growth, FDI, income inequality and average income.

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27 The majority of the findings show that countries characterized by higher levels of economic freedom have stronger economies and provide better lives to their citizens, in almost every way, compared to less economically free countries (Berggren, 2003). For example there are more than forty different empirical studies which report a positive relationship between economic freedom and economic growth (Doucouliagos & Ulubasoglu, 2006). The explanation for this positive correlation is that in market economies, less government intervention leads to an intense competition among companies that forces them to create more valuable outputs than the inputs they use in order to survive (Holcombe, 1998). Other studies like the one of Carter (2007) find evidence that economic freedom leads to a reduction in income inequality by broadening opportunities for income-earning and by redistributing resources from the richer to the poorer. Along these lines Madan (2002) observes that not only income equality but also the other two components of the Human Development Index, the health of the population and the educational attainment, are positively affected by a rise in economic freedom. According to the study of Bjørnskov and Foss (2010) aspects of economic freedom are positively correlated with the degree of entrepreneurship in a country and especially with high-tech entrepreneurial activity. Graeff and Mehlkop (2003) find a strong inverse relationship between economic freedom and corruption while Pantzalis, Stangeland and Turtle (2000) report that a country’s level of

economic freedom moderates the effect of electoral uncertainty on the behavior of stock market indices. The idea that economic freedom may influence political uncertainty is also supported by other scholars like Balassa (2013) who argue that government intervention can lead to more uncertainty.

A large body of literature considers economic freedom as an important determinant of FDI. Dunning (2002) argues that economic freedom is becoming increasingly important for FDI as

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28 MNEs’ motives are shifting from market-seeking and resource seeking towards efficiency

seeking. In agreement with Dunning, Hossain (2016) and Heckelman (2000) argue that economic freedom stimulates FDI, while Kapuria-Foreman (2007) observes that flows of FDI vary

positively when specific components of economic freedom rise. Using a sample of 137 countries Naanwaab and Diarrassouba (2016) report that economic freedom has a significant positive effect on FDI in middle and high-income countries. Similar studies like the one of Caetano and Caleiro (2009) in MENA and EU countries and Quazi (2007) in 7 East Asian economies also provide evidence that economic freedom and FDI are positively associated. Arslan, Tarba & Larimo (2015) focus on the importance of economic freedom distance between countries which according to their findings leads MNEs to choose greenfield entry modes over M&As. Bengoa and Sanchez-Robles (2003) prove that economic freedom moderates the relationship between growth and FDI something that it is also supported by the findings of Hansen and Rand (2006) and Azman-Saini, Baharumshah, and Law (2010). Despite abundant research and the fact that economic freedom is important for both uncertainty and greenfield FDI there is no study examining the interaction between these three variables. This leads us to another research question: To what extent is the relationship between electoral uncertainty and greenfield FDI

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3. Theoretical framework

In this section we focus on the formation of the hypotheses of this study. By merging

relevant literature, theories and variables and transforming them into hypotheses that will address our research questions we aim to reach a better understanding regarding our research topic.

3.1 Hypothesesdevelopment

3.1.1 National elections and greenfield FDI projects

As it was mentioned above the main purpose of this research is to examine the relationship between the political environment of countries and the changes that occur in it, and the flows of greenfield investments that these countries receive. More specifically, we try to examine the impact that different levels of electoral uncertainty might have on the establishment of wholly-owned subsidiaries by foreign MNEs in target countries. Based on that, our main research question is the following:

RQ1: Does electoral uncertainty in target countries influence MNE’s greenfield FDI projects?

The core argument of this study is that the political instability and uncertainty surrounding national elections might play a significant role in the location decisions made by MNEs

regarding the establishment of wholly-owned subsidiaries in foreign countries. Greenfield projects represent long-term commitments for firms and because of these commitments one of the greatest risks in this type of investments is the relationship between MNEs and host countries. As it was already stated, greenfield investments are more sensitive to institutional aspects such as corruption, intellectual property rights and taxation compared to M&A (Hebous,

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30 Ruf & Weichenrieder, 2010; Ayca, 2012). Since these institutional aspects are subject to change, the profitability and in general the success of a greenfield project can also change depending on the specific conditions that are created in the target market. In order for an MNE to establish a subsidiary in a foreign country it needs to invest large sums of time and money and that makes the enterprise vulnerable to political circumstances or events like national elections which result in big changes in the institutional and economic conditions of countries.

Election years are periods characterized by increased political uncertainty. The greater political polarization, the controversy about key political, economic and administrative issues between the various candidates and the ambiguity surrounding the new government and its future policies contribute to the creation of an uncertain political and economic environment which can have a paralyzing effect on long-term decision making (Jens, 2016). Due to the long-term nature of greenfield investments as well as the higher costs and risks associated with them, political instability and uncertainty might lead to a reduction in greenfield FDI flows (Burger,

Ianchovichina & Rijkers, 2013). During this political turning point, foreign investors might hesitate to make an investment decision until there is more certainty regarding the new government’s economic policy agenda (Bak, 2016). Empirical research analyzing how host governments influence foreign market entry decisions also reveals that firms prefer to invest in countries where the governments are credibly dedicated to a set of rules and policies (Holburn, 2001; Henisz & Zelner, 2005). In other words, policy instability or the likelihood that changes will occur in the rules of the game in a way that will negatively affects the interests of the foreign investors, is a significant factor that can discourage FDI inflows towards a country (García, Canal & Guillén, 2008).

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31 The election of a new government can have implications for economic and regulatory

policies like taxation and competition regulations which can undermine the long-term success of companies’ greenfield projects in this specific environment. Companies generally try to

minimize the risk of their investments and for that reason they tend to avoid investing in

countries characterized by high economic and political uncertainty, especially in cases where the size of the investment is substantial (Campa, 1993). For that reason fewer investors are expected to engage in such expensive and high-risk investments in countries during election periods due to the economic and political uncertainty of the environment which eventually increases the overall risk of the investment. Based on the aforementioned arguments it can be contested that a

country’s attractiveness for greenfield FDI is reduced during a year that this country is hosting national elections. Thus, building upon the scholarly consensus on the negative effect of electoral uncertainty on FDI we expect the uncertainty associated with national elections to discourage MNEs from establishing wholly-owned subsidiaries in foreign countries during election years, leading as a result to a reduction in the total number of greenfield FDI projects these countries attract. In cases where MNEs undertake greenfield investments in a foreign country during an election year we anticipate that these companies will adopt a more cautious investment approach due to the economic and political uncertainty of the environment, which will lead to a reduction in the value of their greenfield projects. Therefore, we propose the following hypotheses:

H1: The average value of greenfield FDI projects a country attracts decreases during national election years

And:

H2: The number of greenfield FDI projects a country attracts decreases during national election years

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3.1.2 Moderating role of economic freedom

Economic freedom has been used by various studies as a moderator of the relationship between FDI and several other variables such as growth, economic performance and

productivity. In addition to being an important determinant of FDI (Hossain , 2016), studies show that economic freedom influences the effect of electoral uncertainty on macroeconomic

conditions like the behavior of stock markets (Pantzalis, Stangeland, &Turtle, 2000). However there is still no study examining the interaction between economic freedom, electoral uncertainty and greenfield FDI. Thus, our second research question is the following:

RQ2: To what extent is the relationship between electoral uncertainty and greenfield FDI projects moderated by a country’s level of economic freedom?

Economic freedom is considered a significant factor that investors take into account when they decide about the location of their investments. Countries with freer economies can provide stronger incentives for investment and trade that affect economic activity both within and across borders (North, 1990). High degrees of economic freedom translate into less government

intervention in the economy, the existence of strong property rights and lower levels of

corruption which are all desirable institutional characteristics for more FDI inflows (Sambharya & Rasheed, 2015). Especially for greenfield investments these institutional aspects are of paramount importance and for that reason market economies are assumed to be more attractive for greenfield projects compared to command economies in which state interventionism is higher (Arslan, Tarba & Larimo 2015). This preference of investors for economic freedom might play a critical role during election years, when the uncertainty and the political instability in the

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33 wholly owned subsidiaries in this environment also escalates. As Pantzalis, Stangeland, and Turtle (2000) show in their study, in countries with a low level of economic freedom the

dissemination of information about the government, the other political parties and their political strategies is limited and because of this the uncertainty concerning the implementation of future policies increases. On the contrary, in freer economies this type of information is generally widely available for citizens, investors and other individuals and as a result there is lower uncertainty and ambiguity among foreign investors (Pantzalis, Stangeland & Turtle, 2000).

Following this line of reasoning, economic freedom is assumed to reduce the effect of electoral uncertainty on the attraction of greenfield FDI projects, by providing a more stable framework where foreign MNEs can have easier access to information and where they can also benefit from the advantages that a market economy system has to offer. These advantages like the limited restrictions and barriers imposed by the government, the effective legal framework that protects property rights and the lower degree of corruption (Lawson, 2008) can restore confidence among foreign investors and ultimately reduce the amount of uncertainty and risk associated with a greenfield investment in a period of high uncertainty and instability for countries such as a national election year. In other words, a country’s high degree of economic freedom is expected to reassure foreign MNEs during electoral years that their subsidiaries will be established in an investment-friendly market which will allow them to flourish despite the existence of electoral uncertainty that can hinder these projects. As a result it is predicted that between two countries that are hosting national elections and have a different level of economic freedom, a greater number of MNEs will be willing to invest a larger amount of money on

greenfield FDI projects in the country which is considered to be economically freer. Based on the aforementioned arguments it can be contested that a country’s level of economic freedom will

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34 moderate the relationship between electoral uncertainty and greenfield FDI. Accordingly, we propose another two hypotheses.

H3: The inverse relationship between electoral uncertainty and the average value of greenfield FDI projectsa country attracts becomes stronger as the level of economic freedom decreases

And:

H4: The inverse relationship between electoral uncertainty and the number of greenfield FDI projects a country attracts becomes stronger as the level of economic freedom decreases

3.2 Conceptual framework

Figure 1 represents the conceptual framework for this research.

Figure 1- Conceptual Framework

Electoral uncertainty Average value of greenfield FDI projects Number of greenfield FDI projects Economic freedom

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4. Methodology

4.1 Research design and sample

This study is of explanatory nature. To answer the research questions a quantitative cross-sectional study is performed. Following the majority of the empirical literature (e.g. Katsimi and Sarantides, 2012; Julio & Yook, 2014; Cao, Li & Liu, 2015) we use a quantitative research method because it is the most straightforward way of testing the hypotheses as it can provide reliable and objective conclusions. The study sample contains data from 133 national elections and 108.360 greenfield FDI projects in 51 countries with parliamentary and presidential

government systems from 2003 up to 2015. Table A1 in appendix presents the countries used in our study and their government systems. These countries as well as the sample period and size of sample are selected based on the availability and reliability of data regarding greenfield FDI and national elections. In accordance with the electoral-cycle models which make an assumption of competitive elections, we restrict our sample to countries which have free and fair elections since in other countries electoral outcomes may be the result of voters’ manipulation by the

government and not the result of their informed preferences (Rouquie, Hermet, Rose, & Rouquié, 1978). This distinction is based on the annual ratings a country receives from the Freedom House regarding its level of ‘political rights’ which among other conditions captures the fairness of the elections and the political pluralism. These ratings range from 1 to 7 with 1 representing the highest degree of political rights and 7 the lowest and they are widely used in cross-national research as they are argued to be the most systematic evaluation of a country’s level of democracy (Blais & Dobrzynska, 1998).

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36 Based on the ‘political rights’ ratings, the countries we include in our sample are the ones that have a rating of 1 and 2 throughout the examined period which according to Freedom House and several scholars (e.g. Rouquie, Hermet, Rose, & Rouquié, 1978; Shi & Svensson, 2006; Hyde & Marinov, 2011) indicate a “free” country. Furthermore, because of the existence of different government systems another step in the data collection process is the identification of the chief executive of each country so we can include in our sample the elections which are associated with the selection of the supreme executive power of each country. In presidential systems the office of the president represents the head of the government while in parliamentary systems the executive power resides in a cabinet, the head of which is the prime minister who is the actual chief executive of the nation (Julio & Yook, 2012). Based on these identifications and following the example of previous studies like the one of Katsimi and Sarantides (2012) our sample includes data about legislative elections for countries which have parliamentary systems and presidential elections for countries that have presidential political systems. The resulting data set consists of 34 countries with legislative elections and 16 countries with presidential elections.

4.2 Data

The data for this research are obtained from a variety of secondary sources. The main source regarding the selection of election data is the Database of Political Institutions which is

maintained by the World Bank (Beck, Clarke, Groff, Keefer, & Walsh, 2001). This database is one of the most cited databases in political and economic science research with more than 3000 studies using it for political and institutional data (Cruz, Keefer & Scartascini, 2016). It provides information about electoral rules and political parties as well as annual information regarding elections and authority characteristics of all independent states which have total populations that exceed 500,000 people, covering 172 countries between 1975 and 2012. For election data

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37 regarding the period between 2012 and 2015 we use the current version of the Database of Political Institutions, hosted at the Inter-American Development Bank which expands its coverage to 180 countries between 1975 and 2015 (Cruz, Keefer & Scartascini, 2016). Data on greenfield FDI flows are collected from the World Investment Reports of the United Nations Conference on Trade and Development (UNCTAD). These datasets contain information concerning the number and the value of greenfield FDI projects in 192 countries between 2003 and 2015 and they are used as the primary source of greenfield data by a large number of business scholars, big organizations and more than 100 countries (Times, 2012).

Data regarding the level of economic freedom of countries are collected from the Heritage Foundation. This research institute in collaboration with the Wall Street Journal created an annual index which measures the degree to which countries are economically free. The Index of Economic Freedom covers 186 countries during the period 1995 and 2016 for which it gives an economic freedom score based on ten quantitative but also qualitative factors. Numerous studies in the economic freedom literature use this data set as their main source of information because of the comprehensive set of principles it uses and its relatively low amount of missing data (Heckelman, 2000). Finally, for our control variables our source of information is the World Bank database. World Bank databases contain information about the market size, market potential and trade openness of more than 180 countries between 1960 and 2015. The aforementioned databases are the most widely used in the literature regarding political

environment and foreign investments and are considered globally comprehensive and reliable which makes them the most suitable databases for our research.

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38 4.3 Variables

4.3.1 Dependent Variables

The average value and the number of greenfield FDI projects represent the dependent variables of this study. The former refers to the average value of greenfield FDI inflows into a recipient country from all foreign investors and it is measured in billions of dollars while the latter refers to the number of wholly-owned subsidiaries that MNEs establish in target countries. These variables have been used as dependent variables in many empirical studies and official reports that examine changes in FDI inflows and outflows (e.g. UNCTAD, 2000; Gassebner & Méon, 2010; Byun, Lee, & Park, 2012). Furthermore the selection of the average value and the number of greenfield FDI projects is also based on the recent literature on heterogeneous firms and trade which indicates that trade costs have a different effect on the intensive margin (described by the volume of trade per firm or product) and extensive margin (described by the number of trading firms or traded products) (Byun, Lee, & Park, 2012). Based on that and by building on previous studies, the use of these two dependent variables help us examine if there are also differences in the effect of other factors such as electoral uncertainty on the intensive and extensive margin of FDI.

4.3.2 Independent Variable

The independent variable of this research is electoral uncertainty. We use electoral

proximity as a proxy for electoral uncertainty. This empirical strategy is based on the reasonable assumption that the electoral and generally the political uncertainty is higher on average closer to elections compared to other time periods (Julio & Yook, 2012), an assumption which is

supported by a great amount of empirical evidence (e.g., Mei & Guo, 2004; Bialkowski et al., 2008; Boutchkova et al., 2011; Bak, 2016). In line with previous studies (e.g. Afonso, Grüner &

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39 Kolerus, 2010; Warshaw, 2016; Bak, 2016) we create an electoral proximity dummy (elec) which takes the value 0 in an electoral year, regardless of when exactly the elections occurred during that year, and values 1, 2, 3 and 4 in non-election years, depending on how many years left for next elections (4 is the highest since no country in our sample has an office term of more than 5 years). We use this dummy as it allows us to examine possible changes in the uncertainty throughout election cycles by comparing differences between electoral and various intermediate years. In addition we only take into account constitutionally scheduled elections and not early ones in order to facilitate the comparison of our results with the results of previous studies in the field. In countries where it is possible to held early elections, the election dummy resets in the case of early elections in accordance with the guidelines in the codebook for the database of political institutions (Keefer, 2012).

4.3.3 Moderating Variable

The level of economic freedom of countries is the moderator in this research as it is

expected to influence the relationship between national elections and greenfield investments. We measure the degree of freedom in an economy by using the Index of Economic Freedom

published by the Heritage Foundation and the Wall Street Journal. This index consists of ten freedom measurements which are business freedom, fiscal freedom, monetary freedom, trade freedom, government size, investment freedom, property rights, financial freedom, freedom from corruption and labor freedom. Each component receives a grade between 0 and 100 with 100 representing the maximum freedom and then they are all averaged to produce an overall economic score for every country (Miller & Holmes, 2009).

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4.3.4 Control Variables

Previous studies suggest that there are numerous factors affecting the size of FDI flows towards a country. Following the literature, this research will operationalize market size, market potential and trade openness as control variables considering they are commonly used in many empirical studies as control variables for the examination of the investment behavior of MNEs. Market size is measured by nominal GDP, market potential as the annual growth rate of GDP and trade openness refers to the sum of exports and imports scaled by GDP (World Bank Group, 2015). These variables are suitable for our study since they capture not only institutional but also macroeconomic characteristics of the destination countries which play an important role in the attraction of foreign investments (Julio & Yook, 2014). Countries with large markets, high growth and high export orientation represent attractive FDI destinations with abundant

investment possibilities (Demirhan, & Masca, 2008; Canton & Solera, 2016) and for this reason are expected to be positively related to greenfield FDI inflows.

4.4 Method

The Statistical Package for the Social Sciences (SPSS) was used in order to analyze the collected data. In order to test our first two hypotheses we conducted separate one-way Analyses of Covariance (ANCOVAs). The reason we chose this method instead of a Multivariate Analysis of Covariance (MANCOVA) is that our two dependent variables are not correlated with each other. When there is no correlation between dependent variables separate ANCOVAs are more suitable because a multivariate test in this case will lack power and sacrifice degrees of freedom unnecessarily (Field, 2013; French, Macedo, Poulsen, Waterson & Yu, 2008 ). In our

ANCOVAs electoral uncertainty is the independent variable, the average value and number of greenfield FDI projects are the two dependent variables and market size, market potential and

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41 trade openness are the control variables. The third and fourth hypotheses regarding the

moderating effect of the level of economic freedom were tested through the use of the Process macro for SPSS written by Andrew Hayes (2012), which is a statistical procedure specifically designed to test various types of moderation and mediation relationships.

The impact of electoral uncertainty on the attraction of greenfield FDI and the moderating role of economic freedom