Abstract

A large body of scholarship in political economy suggests economic growth, and foreign direct investment in regulated industries in particular, is more likely to occur when formal institutions allow states to provide credible commitments regarding the security of property rights. In contrast, this article argues that we must instead examine differences in firm organizational structure and embeddedness to explain variation in the resilience of privatization contracts in weak institutional environments. Domestic investors—or, if contracts are granted at the subnational level, domestic investors with diverse local holdings—work most effectively in the developing world. Domestic investors are better able to negotiate mutually beneficial adaptations to their formal contracts with host governments because they can draw on informal contractual supports that derive from cross-sector diversification and embeddedness in the market. This article finds strong support for this argument through an analysis of fourteen water privatization contracts in Argentina.