A defining feature of the current era of globalization is the enormous scale of foreign direct investment (FDI) flows. In economics and political science, FDI is largely viewed as a desirable phenomenon. When multinationals acquire controlling stakes in the firms of a country, the economy tends to grow faster, local wages often rise, and the influx of know-how and capital can generate productivity spillovers for domestic companies. Importantly, FDI does not have the same destabilizing potential as cross-border portfolio investments, which tend to be more liquid and have shorter time horizons.

Despite these attractive properties, political support for FDI is far from uniform, and restrictions on the foreign ownership of domestic firms are widespread. In her excellent new book, Sarah Bauerle Danzman documents major cycles of hostility and openness to foreign investment, from a spate of nationalizations in the 1970s, through the “neoliberal” 1980s, to the nationalist retrenchment that many countries are experiencing today. Against this backdrop, she asks, Why do governments open an industry to FDI?

In recent years, several authors have attempted to answer this question. One important strand of scholarship highlights the roles of partisan politics and democratic institutions as determinants of FDI policy. In that account, foreign investors are welcomed when democratic institutions elevate the public’s demand for liberalization or when a governing party’s voters benefit from FDI. In Merging Interests, the author challenges this bottom-up story and urges “political economists to be slower to assume economic policy and macro-management choices are the product of particular ways in which political institutions aggregate a diverse set of preferences.” Bauerle Danzman argues that collective action problems and a lack of information often prevent voters from playing an active role in the design of complex policies: “In many areas of economic political decision making, publics are simply not in the negotiating room” (p. 67).

The key contribution of this book is thus to develop a new theory of FDI policy that focuses on the power of economic elites. Bauerle Danzman’s argument rests on two main pillars. First, in many countries, FDI policy is guided by the preferences of a limited group of politically influential firms. Second, the preferences of those firms largely depend on the conditions under which they can access the capital that they need to run or expand business operations. When state-owned banks can offer preferential loans or when banking deregulation allows conglomerates to facilitate loans between related parties, well-connected firms gain increased access to cheap loans. However, where banking reform prevents governments from engaging in financial repression, well-connected firms lose their preferential access to capital. In this context, economic elites view FDI liberalization more favorably because it allows access to new sources of funding in the form of equity investment by foreign-owned enterprises. In short, Bauerle Danzman’s theory is of a “quiet politics” (see Pepper Culpepper, Quiet Politics and Business Power: Corporate Control in Europe and Japan, 2010) of FDI policy; the theory recognizes the heterogeneity of firms’ power and preferences and places financing constraints at its core.

Bauerle Danzman leverages a mix of quantitative and qualitative evidence to test her argument. In two quantitative chapters, she uses country-, industry-, and firm-level regression analyses to assess the determinants of FDI policy. At the country level, she finds a robust link between financial repression and investment liberalization: countries with efficient banking sectors tend to have more liberal FDI regimes, and banking reforms that reduce preferential lending to connected firms are linked to lower barriers to equity participation by foreigners. At the firm level, the author provides convincing evidence that large, well-connected firms are especially likely to engage in lobbying, which justifies the theory’s emphasis on such firms. At the industry level, Bauerle Danzman observes more active FDI policy in capital-intensive industries, where the financing constraint is most severe. She also finds that the effect of capital intensity on FDI liberalization is conditioned by credit market conditions, although our reading is that the evidence for this conditional effect is mixed and is consistent with the idea that capital-intensive industries could be more actively “managed” rather than “liberalized.”

To complement the quantitative evidence, Bauerle Danzman offers detailed comparisons of FDI policy in Indonesia and Malaysia from 1965 to the present. These case studies show that the process by which FDI policy changes is neither simple nor inevitable. In the run-up to the 1997 financial crisis, the two countries reached similar levels of openness to FDI, but their trajectories diverged sharply in the aftermath. During the crisis, Indonesia used IMF funds to save state-owned banks, and the government retained substantial control over credit allocation. This allowed connected firms to maintain their preferential access to financing and alleviated pressure to liberalize FDI. In contrast, the Malaysian government responded to the crisis by implementing a deep reform of its banking system, which pushed business elites to seek more partnerships with foreign investors. These case studies offer vivid illustrations of the theory’s main mechanisms; they show how shifts in economic elites’ preferences translate into policy outcomes. The cases also pose an important challenge to more bottom-up approaches by showing that FDI liberalization can sometimes be championed by chambers of commerce while labor groups are marginalized.

The case studies also raise a few issues that the book leaves unresolved. For instance, the author offers a rich theory of the firm, which highlights the heterogeneity of preferences across industries and recognizes trade-offs between the different sources of capital that companies can access. In contrast, the book sometimes treats the state as a passive actor that is moved by exogenous economic shocks or captured by well-connected firms. As the qualitative evidence from Indonesia and Malaysia shows, however, FDI policy and banking reforms are both elaborated in specific contexts, where governments try to retain power while balancing the competing demands of elites and masses or of different ethnic groups. Investment policy and banking reforms are not imposed by economic crises or dictated by lobbies; they are often forward-looking, strategic, and informed by an understanding of their real distributive consequences. Bauerle Danzman has convinced us that firms’ preferences and financing constraints must be taken into account by theories of FDI policy. Future work would do well to combine this important insight with a more complete theory of the trade-offs and strategies that determine when a government uses different economic levers.

In our view, Bauerle Danzman has made a major contribution to the field of international political economy. Merging Interests proposes a rich and convincing new theory of FDI politics that emphasizes the elite-driven nature of economic policy making. By placing the firm at the center of the analysis, by integrating a heterogeneous firms logic analogous to recent advances in trade politics research, and by bringing together several data sources and methodological approaches, Bauerle Danzman has both broken new ground in our understanding of one of the most important aspects of globalization and shown us an exciting path forward for future work.