Bundling Institutions: How Institutions Influence the Location of FDI

• In Event: The Politics and Economics of Bilateral Investment Treaties

Abstract

How do institutions influence the location of foreign direct investment (FDI)? Existing literature focuses on the role of domestic courts and international agreements, in particular, bilateral investment treaties (BITs) that settle investor-state disputes. The effect of transnational commercial arbitration (TCA) institutions, however, remains understudied. These institutions play an important role in cross-border transactions by providing impartial venues for foreign investors to resolve their contractual disputes with domestic firms. Using firm- level data, I find that a combination of BITs and TCA institutions leads to an increase in FDI inflows because it can mitigate both political and contractual hazards for foreign investors. Moreover, the effect of this combination is stronger in countries with a lower level of judicial independence. Finally, these two sets of international institutions are useful to attract FDI only when jointly present.

Author

• Weiwen Yin, Texas A&M University