Escape FDI and the dynamics of a cumulative process of institutional misalignment and contestation : stress, strain and failure

Abstract

We argue that escape foreign direct investment (FDI) happens when unknown future “rules of the game” cause concern about the continued productive capacity of the economy. Adapting the stress-strain-fail model of materials failure, we argue that escape FDI is a process with three cumulative phases. Conditions for escape FDI (stress) are created by institutional deterioration and contained contestation. Limited escape FDI (strain) results from periods of societal instability and/or inadequate institutional reforms. Extensive escape FDI (failure) results from pervasive societal instability and/or fundamental changes in institutions. Using a historical approach, we develop these propositions for South Africa, 1956 to 2012.