Protecting Home: How Firms' Investment Plans Affect the Formation of BITs

• In Event: International Collaboration and Foreign Investment

Abstract

It is commonly accepted that developing countries promote the creation of bilateral investment treaties (BITs) to attract foreign direct investment (FDI). However, I argue that BIT creation is driven by developed countries' desire to protect their firms’ existing FDI plans. When negotiating FDI deals, multinational corporations (MNCs) anticipate potential investment disputes between themselves and host governments. MNCs seek to reduce future investment risks through cooperation with their home governments to establish BITs, which allow future disputes to be resolved by international arbitration and therefore increase MNCs' bargaining leverage over host governments. This study analyzes new data about FDI project announcements, which captures the timing of when MNCs finalize their plans to engage in FDI. The findings show that MNCs' planned FDI is strongly associated with the probability of the BIT signing between home and host countries. Moreover, by matching firm-level financial information with FDI project announcements, I show that home countries are more likely to establish BITs with host countries as the proportion of the largest firms' planned FDI increases. These findings suggest that BIT creation is not driven by host countries' economic needs, but rather by home countries' desire to protect their politically privileged firms.

Author

• Seungjun Kim, University of California, Merced