Ethnocentrism Reduces Foreign Direct Investment

Abstract

The tension between global economic integration and ethnocentrism is a growing political force across industrialized countries. Whereas extant research emphasizes ethnocentrism’s influence on individual attitudes, we show that ethnocentrism has direct economic costs. We exploit strong public support for greenfield foreign direct investment (FDI) to isolate ethnocentrism’s costs. Our analysis of US state greenfield FDI flows during 2004–12 holds constant country-level factors that correlate with both ethnocentrism and propensity to receive FDI. A 1 standard deviation increase in state ethnocentrism, as manifest in anti-immigrant sentiment, corresponds to approximately $229 million less greenfield FDI and 180 fewer jobs per state-year on average. Findings are robust to controls for state economic conditions, transactions costs, existing FDI stock, demographics, and state partisanship. These findings clarify the economic cost of ethnocentrism-based political strategies and suggest that mass political sentiment constrains global economic integration.

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