The global economy as instituted process: The case of

Contemporary globalization is distinctlymarked by the unprecedented rise in foreign direct investment (FDI). Considered “one of the most stable and economically important of the international capital flows ” (Jensen 2006:23), world yearly FDI inflows reached a spectacular $1.4 trillion in 2000. By 2004, coun-tries had accumulated an estimated $9 trillion in FDI stock, or 22 percent of the world gross domestic product (GDP) (UNCTAD 2006). What drives these cross-border economic exchanges? Most existing studies of determinants of FDI offer supply-side explanations, focusing on investors and their instrumental calculations in search of profits across national borders (for recent reviews, see Blonigen 2005; Chakrabarti 2001). By contrast, I emphasize the social foun-dations and active construction of demand for foreign capital by receiving countries that want to integrate into global connections. I argue that states contribute to the institutionalization of the global economy by granting formal and substantive legitimacy to FDI. Formal legiti-macy reflects a state’s efforts to institutionalize globalization, in formal free market policies, as a normatively desirable development strategy. Substantive legitimacy refers to how a state’s commitment to attracting FDI is reflected in informal norms and practical economic inter-actions. Largely independent of the general set of rules they adopt, states can provide domes-tic and foreign business actors with more or less ideational and organizational resources to encourage foreign investment. Levels of for-mal and substantive FDI legitimacy signal the intensity of demand for foreign capital and sig-nificantly shape the amount of FDI that coun-tries receive. I test this argument by examinin