Ben Helms (Virginia), Sonal Pandya (Virginia), and Sheetal Sekhri (Virginia)

Bartering Bureaucrats: FDI Increases Rent Seeking

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Abstract

How does global economic integration shape governance in developing countries? We analyze the effects of foreign direct investment (FDI) on bureaucracies, a critical linch-pin of governance largely overlooked in existing research. We overcome the endogeneity between integration and governance by leveraging India’s sudden and extensive 2005 FDI liberalization. Politicians’ relocation of bureaucrats provides a revealed, real-time measure of politicians’ motives vis- a-vis foreign firms. Using multiple identification strategies, we show that state politicians relocate loyal but less competent Indian Administrative Service bureaucrats to FDI-exposed districts. Turnover is pronounced in more corrupt states and in districts with FDI originating from more corrupt countries. Politicians who represent FDI-exposed constituencies see an average 24 percent increase in their personal assets, but only when their party belongs to the state’s ruling coalition government. Consistent with worse governance, survey respondents in exposed districts express falling confidence in state politicians. We rule out several threats to inference and plausible alternative mechanisms. Our findings highlight politicians’ manipulation of the bureaucracy as a novel mechanism through economic integration undermines governance.