Why Split State Governments Draw More Foreign Investment

📌 The Puzzle and Argument

Does the partisan makeup of state governments shape where foreign multinationals locate? The article argues yes: partisan differences in state economic-development strategies persist, and foreign firms value elements of both parties' approaches. Republicans tend to favor an investment-driven (supply-side) growth model, while Democrats favor a consumption-driven (demand-side) model. Because each approach offers distinct benefits to multinational firms, a blend of policies—most likely produced under split (divided) state government—makes those states especially attractive.

📊 What Was Tested and How

• Time-series cross-section analysis of U.S. states covering 1977–2004.
• Dependent variable: location decisions of foreign multinational companies (FDI) at the state level.
• Key independent variable: partisan composition of state government (unified Republican, unified Democratic, or split).
• The design evaluates whether mixed-party state governments yield policy mixes that matter for FDI attraction.

🔍 Key Findings

• Partisan differences in state economic-development policy remain meaningful for firms.
• Republican-led policies emphasize investment- and supply-side tools; Democratic-led policies emphasize consumption- and demand-side tools.
• Both types of policies are valuable to foreign investors rather than mutually exclusive attractions.
• States with split governments, which are more likely to produce a blend of supply- and demand-side policies, are preferred locations for FDI.
• Empirical results from the 1977–2004 panel support these claims.

⚖️ Why It Matters

The analysis reframes how partisan control at the state level influences economic outcomes: the advantage for foreign investment may lie not in one party’s dominance but in institutional arrangements that produce policy mixes. This has implications for understanding state competitiveness, intergovernmental variation in economic policy, and how firms respond to political incentives when choosing locations.