Foreign Direct Investment, Outsourcing Investor Protection, and the Role of Information Quality

• In Event: 6.02. Institutional Factors and Information Content

Abstract

The vast literature on bilateral investment treaties (BIT) shows that when developing countries sign BITs, investment inflows increase. It is commonly assumed that this occurs because BITs reduce investment risks. We provide new insight into the relationship between investments and BITs through two innovations. First, we show that firms often make investments before investment protections are offered through BITs. Second, we show that the quality of the information environment plays a crucial role in mitigating risks and so affects the extent to which firms can anticipate BIT formation. We found that anticipation effects are strong for investments made in developing host countries. Importantly, the strength of this relationship is positively associated with the quality of the host country information environment. These findings reveal an important new dynamic between investments and BITs and the role that richer information environments play in stimulating investment flows.

Authors

• Viktoriya Zotova, Georgetown University

• Heedong Kim, City University of New York

• SuengJun Kim, University of California, Merced

• Rebecca Hann, University of Maryland-College Park