Colonialism 563 one value that the dependent variable can take.Its uniqueness is twofold.First, it involves the explicit or implicit use of force by the colonial power over the annexed region.Second,the relationship is exclusive;that is,the colonial power acts unilaterally and not in concert with other powers (and often explicitly to exclude them). To express the thing to be explained more generally,colonialism is simply one example of interstate interaction occurring along two dimensions.[For ease of exposition,I refer to potential colonial powers as "home countries" (that is,sources of foreign investment)and to potential colonized regions as "host countries"(that is,sites of foreign investment).The first dimension of variation is the extent to which a home country engages in the use or threat of military force in its relations with the host country.Variation along this dimension runs from military intervention at one limit to the absence of government involvement at the other.The second dimension is the degree to which home countries act in concert toward a host country.Variation along this dimension runs from unilateral and exclusionary action by a home country at one limit to cooperative multilateral action by many home countries at the other.Those so inclined might imagine a two-by-two matrix with the use of force (or conflict more generally)between home and host countries on one axis and conflict among home countries on the other.The four positions described here would occupy the four cells (home-host and home-home conflict is colonialism,home-host and home-home cooperation is peaceful multilateral negotiation,and so on),but there is no reason to believe that variation does not allow for a continuum of outcomes.In this context,colonialism (the unilateral use of force)is one possible outcome.Other potential outcomes include multilateral use of force,bilateral arms-length negotiations,or multilateral negotiations-and gradations in between. Other characteristics of home-country policy may well be of interest.For example,it may be important to understand the domestic distributional implications of a government's policy toward the foreign assets of its citizens, such as the subsidization of overseas investors by national taxpayers.It may also be important to understand the ways in which relations between home and host countries,or among home countries,are institutionalized at the international level.7 Other potential topics suggest themselves,but I focus on those mentioned above. In any case,the issues addressed here involve home-country conflict with host countries and conflict among home countries.These capture much of the theoretical debate and historical experience.Putting the two dimensions together covers everything from unilateral military intervention leading to colonial annexation,through multilateral intervention that preserves the 7.For a discussion of the analytical issues in the development of such international institutions, see Robert Keohane,"International Institutions:Two Approaches,"Intemational Suudies Quarterly 32 (December 1988),pp.379-96.See also Michele Fratianni and Johr Pattison,"The Econamics of International Organization,"Kyklos 35 (1982),pp.244-62
564 International Organization sovereignty of the host nation,to private bilateral or multilateral negotiations. This redefines the outcome of interest,so that colonialism is one of several possible results of home-home and home-host interaction;in other words,it describes variation in the dependent variable.The next step is to focus on the explanatory variable proposed,which is differing characteristics of interna- tional investment. The following section explores the impact of various kinds of international investments on the policies of potential colonial powers,up to and including colonialism.It ignores many other issues,such as investments among devel- oped countries,except where these impinge directly on the theme.The article also ignores potentially important noneconomic factors that might have affected colonial rule.I have done so only to delimit the problem in a manageable way;I certainly do not wish to deny the importance of other considerations,only to plead for the incorporation of certain economic concerns into explanations of a complex reality.Excluded from the analysis by design is consideration of military,geopolitical,technological,and a host of other factors.I have dealt with some of these in a limited way elsewhere;for now I focus on the economic nature of international investment.8 International investment,property rights, and international conflict The international politics of international investment are largely organized around two broad problems.The first is the desire of investors to monitor and enforce the host country's respect for cross-border property rights.The second is the degree to which different foreign investors engage in collective action to carry out these monitoring and enforcement activities. The security of property across borders is in essence a contractual problem. Overseas investment involves an implicit or explicit contract between the investor and the host state.9 This contract may commit a host government to 8.See Jeffry A.Fricden,"The Economics of Intervention:American Overseas Investments and Relations with Underdeveloped Areas,1890-1950,"Comparative Studies in Sociery and History 31 (January 1989),pp.55-80,which also presents some of the ideas contained in the present article. The facts that I exclude other potential explanatory variables from my analysis and that I do not weigh the large number of contending explanations are a problem only if there is reason to believe that one of the alternate explanatory variables is correlated with mine and may outperform it.One exception is the role of economic develapment,which is probably correlated with types of investment;indeed,in the essay cited above I suggest a complex interaction among development, foreign investment,and foreign intervention.In this context and more generally,it is nonetheless legitimate to argue for the validity of my hypotheses as part of a full explanation of the phenomena in question. 9.An explicit discussion of this concept,specifically in regard to sovereign lending,can be found in Vincent P.Crawford,Intematianal Lending,Long-ter Credit Relationships,and Dynamic Contract Theory Princeton Studies in International Finance,no.59 (Princcton,N.I.:International Finance Section,1987).Further references to this very large literature can be found therein
Colonialism 565 repay a loan,to allow a firm to mine copper,or to permit the establishment of a local branch factory of a multinational corporation.If the host government breaks the contract-by not servicing the loan,expropriating the mine,or closing down the factory-foreign investors have no direct recourse.This requires investors to devise some mechanism to monitor and enforce their property rights.In this sense home-country military force is one choice among a number of devices to protect overseas assets. All investors face contractual or quasi-contractual problems in the course of business;this fact is central to modern analyses of industrial organization.0 The existence of a state domestically does not solve the problem,for it is costly to recur to the court system.Investors come up with a variety of ways to overcome contractual problems,ranging from the use of forward markets through long-term agreements in which both parties make irreversible invest- ments (what Oliver Williamson terms"mutual hostages"),to vertical integra- tion. Regarding the security of property across borders as a problem in relational contracting directs attention to characteristics of the assets,product markets, and informational environment that affect the ability of the parties to monitor and enforce their contract.Variation in such contractual problems in turn gives rise to different organizational or political responses.2 In addition to underlying contractual questions,the need for investors to monitor and enforce host-country compliance can lead to problems of collective action.In many cases,of course,property rights can be secured on a purely individual basis so that there is no incentive for investor collaboration. All investors may have a common interest in ensuring stable rights to private property,but this does not mean that such stable rights must necessarily be provided to all investors.13 Each investor is first concerned about the investor's own property rights,and an investor can,in fact,benefit by receiving exclusive property rights.Where secure property rights can be supplied on a specific basis to specific investors,there is little reason for cooperation among investors. On the other hand,the protection of foreign property may be made substantially more effective if investors cooperate.Whenever the combined action of many investors reduces the cost of protecting their property to each 10.An infuential example of such an analysis with an explicit contractual emphasis is Oliver Williamson,The Economic Institutions of Capitalism (New York:The Free Press,1985). 11.I6id,pp.169-205. 12.The approach presented here is related to that of Keohane;see Robert O.Keohane,"The Demand for International Regimes,"fntemational Organization 36 (Spring 1982),pp.325-55. Keohane also relies on the relational contracting literature,especially as regards the role of institutions in reducing transactions costs,in his explanation of regime persistence. 13.In what follows I focus on property rights.The discussion could be extended to include many other policies,from taxation and tariffs to labor relations.In virtually all instances,the same tension between general and specific investor interests recurs.I emphasize property rights partly because they are in some sense primordial-without securiry of property few other policies matter-and partly because the general point can easily be broadened to other issues
566 International Organization investor,cooperation would be desirable to them.This might be the case,for example,when evaluating the host government's compliance with contractual commitments can be costly-such as when it is difficult to separate the impact of exogenous events from straightforward cheating.In this case,crucially important accurate information about the host government's actions and intentions serve all interested investors,and it is in the interest of all to cooperate in obtaining the information.Another example might be when the threat of sanctions by investors (or their governments)leads to host-country recognition of cross-border property rights to all(or a broad class of)foreign investors.The more investors(or countries)participate in the sanctions,the more effective they will be for all.14 However,the circumstances that can make cooperation attractive to inves- tors can also make it difficult.If the benefits of joint action accrue to larger groups of (or all)foreign investors,such protection may come to take on the characteristics of a public good.Under these circumstances,a host govern- ment's commitment to respect the property of foreign investors (or a class of foreign investors)is indivisible,inherently available to all investors (or alt members of a class of investors).When monitoring and enforcing compliance with quasi-contractual commitments to property rights serves a large class of (or even all)investors,there may be collective action problems associated with the provision of this public good.15 Because the public good would benefit a large group of actors,actors have an incentive to cooperate to help provide it; cooperation is hindered by the fact that noncooperators cannot be excluded from benefiting from the provision of the public good.16 The more the protection of property requires joint action to accomplish,the greater the potential gains from cooperation;but the more difficult collective action,the less likely such cooperation is to succeed.Where joint action by international investors to monitor and enforce property rights improves their welfare,the probability of successful cooperation is a function of free-rider problems.To summarize:cooperation among investors becomes more likely as the potential return to investor collaboration increases (i.e.,the more monitor- ing and enforcement are public goods).And as collaboration among investors becomes more likely,the easier it is to organize collective contribution to monitoring and enforcement.17 Emphasizing these considerations is not to 14.For an analysis of sanctions,see Lisa L.Martin,Coercive Cooperation:Explaining Multilatera! Economic Sanctions (Princeton,N.J.:Princeton University Press,1992). 15.For a discussion of monitoring and enforcement assurances serving as a welfare-improving public good,see Douglass North and Barry Weingast,"Constitutions and Commitment:The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,"Joumal of Economic History 49 (December 1989),pp.803-32. 16.This broad class of problems has,of course,been the subject of an enormous literature on strategic interaction,to which I allude only in passing here. 17.Jack Hirshleifer,"From Weakest-link to Best-shat:The Voluntary Provision of Public Goods,"Public Choice vol.41,no.3,1983,pp.371-86.Hirshleifer differentiates among different types of collective action problems that concern the provision of public goods in ways that are applicable to the present setting.In a"weakest link"context,supply is a function of the smallest
Colonialism 567 downplay the importance of other,noneconomic,elements;it is to argue for the anticipated political implications of these economic factors,all else being equal. Thus the two dimensions of variation in the characteristics of international investment that I expect will affect the probability that such investment will be associated with colonial rule may be summarized as follows:the first is the ability of the investment to be protected by force;the second is the degree to which monitoring and enforcing a host government's respect for foreign property has the character of a public good,and (if it does)the difficulties in overcoming collective action problems to supply the public good. International investment and conflict: analytical expectations The preceding discussion is only useful inasmuch as it leads to otherwise nonobvious analytical expectations.In what follows,I summarize features of cross-border investments and of the markets in which those investments operate,both of which I expect will affect the character of the monitoring and enforcement of international property rights and the degree of collaboration among international investors in pursuit of this monitoring and enforcement. In other words,variation in these factors should be associated with (1)variation in home-state use of force against a host state and(2)the degree of home-state cooperation over investments of this type.Once again,these should be taken as potentially contributory rather than necessarily competing variables in a complex explanation that includes a wide variety of economic,political, military,cultural,and other considerations.For my more limited purposes,the factors relevant to this evaluation of the use of force by and cooperation among investing countries can be grouped into the two categories described above and then can be applied to particular classes of investments Site specificity and the costs of physical protection Some assets can be more easily protected,and some contracts more easily enforced,by the use or threat of force than others.Put another way,the rents accruing to some assets can be more easily appropriated or protected by force than the rents accruing to other assets.To some extent,the appropriability of the asset and its income stream is related to the asset's specificity to a particular site or corporate network.For example,the income stream created by a copper mine is specific to the place where the copper is located.The mine,and the resource rents associated with it,can be seized by a host country with relative contribution,while in a"best shot"setting,it depends on the largest contribution.In the former case,Hirshleifer shows,the level of the public good provided will be much larger than in the latter