The Bargaining Context and FDI in Costa Rica and Guatemala

Abstract

In this chapter, the bargaining leverage of two small, open-economy countries is examined in order to better understand the factors which determine FDI flows, and the process by which the investment seems to produce different results. The expectation is that FDI will be associated with better development outcomes where it interacts with strong political and economic context conditions that contribute to host-country bargaining leverage. When FDI flows into a relatively weaker host country, it is expected to interact in opposite ways to help perpetuate a vicious cycle of underdevelopment and political instability. The context conditions which contribute to bargaining power vis-à-vis foreign investors also contribute to host country ability and willingness to pursue economic development and political stability. Thus, the through-time comparison will provide some leverage on the problem of whether there are feed-back cycles involved in development patterns. Such a comparison will also allow us to examine the possible temporal sequence among the key variables, FDI, political stability, economic growth, and development.