The Shield of Nationality: New book explains enduring role of the nation in the international economy

In the last decades, theories of globalization have suggested diminishing effects of nationality in the international marketplace. National borders are portrayed as increasingly meaningless, as governments are beholden to the demands of international capital. This is thought to be especially true in emerging market countries, which cannot take measures that would risk capital flight or deter foreign direct investment. It comes as somewhat of a surprise then that these governments have shown themselves willing to break contracts with foreign firms. After all, why would investment flow into a country where property rights cannot be taken for granted?

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.

Shield of Nationality

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.