In her new book, The Shield of Nationality: When Governments Break Contracts with Foreign Firms, Rachel Wellhausen demonstrates the enduring strength and significance of nationality in matters of international political economy. Wellhausen finds that a nationally diverse investor community allows governments to in effect respect some property rights while compromising others.
Firms of the same nationality can benefit from “shields” against government mistreatment. Faced with an unfriendly host, co-national firms are likely to band together and lobby diplomats to act on their behalf and divert their investments if a co-national’s contract is breached. Nationality thereby constrains the choices governments have when looking to break contracts.
But, Wellhausen’s research shows that if a contract with a firm of one nationality is broken, firms from other countries are unlikely to blink. So if a country is hosting diverse sources of capital, the cost of losing one source may be relatively low. In this sense, the more internationalized the government’s economy is, the easier it is for that government to break some contracts — greater international diversity in the economy increases governments’ ability to prioritize domestic political or economic goals at the expense of foreign capital.