Domestic and International Institutions and Foreign Investment

Session Submission Type: Virtual Full Paper Panel

Session Description

Foreign investment not only pertains to inter-state relations between home and host countries, but also involves non-sate actors such as MNCs. Once private actors commit investments in a host country, their capital is under the influence of foreign jurisdiction, thereby increasing the risk of losing property. As a result, scholars have studied different conditions and settings of institutions as one of key factors that affect such an international capital flow. While previous studies often focused on types of domestic political regimes (i.e., democracy vs. nondemocracy) or the presence of inter-state treaties to explain FDI flows and destinations (e.g., Milgrom et al. (1990), Li and Resnick (2003), Jensen (2006)), recent studies have taken a step further to explore how variations of these institutions affect incentives and behaviors of relevant actors (e.g., Mansfield and Milner (2012), Haftel and Thompson (2013), Allee and Peinhardt (2014), Arias et al. (2018), Chen and Ye (2020)). Building on these studies, and meeting this year’s theme of promoting pluralism, this panel aims to attract attention and stimulate research on the interaction between institutions and foreign investment actors’ behaviors. In doing so, the panel brings together papers that address this issue from various angles with diverse methodologies.

The first paper by Barry argues that while political change or crisis may increase FDI termination, it is conditioned by host countries’ institutional composition. The second paper by Sumner and Gandhi also looks at political instability and firms’ investment decisions but focuses on dictatorships. The paper argues that when a host country undergoes a gradual personalist power consolidation, firms from personalized dictatorships will be familiar with this process and are more likely than firms from non-personalized regimes to invest in this country. However, when the dictator exits suddenly, firms react similarly. Shifting the focus to inter-state treaties, the third paper by Park highlights domestic political and judicial institutions of host countries to examine i) which host country is willing to offer ISDS; and ii) which offers a strong form of ISDS (e.g., International Centre for Settlement of Investment Disputes). Lastly, the paper by Kerner zooms into the ISDS institution and explores how umbrella clauses that allow BITs to expand the scope of ISDS to cover side agreements may affect firms’ willingness to resort to treaty-based investor protection.

These papers address the panel’s topic with diverse perspectives. First, in terms of actors, papers ensure that the role of institutions on foreign investment is discussed from all relevant actors’ viewpoints. While Park examines host governments’ incentive to include strong ISDS measures in BITs, other three papers focus on firms’ investing decisions with Kerner also addressing preferences of home governments. Second, the panel’s papers examine various aspects of given institutions and explore how such variations within an institution (e.g., domestic regime type or international treaties) affect actors’ investment choices. With respect to domestic political institutions, Barry as well as Sumner and Gandhi move beyond the binary label of democracy and autocracy and highlight other domestic factors (i.e., domestic institutional composition (Barry) and difference in political instability induced by dictator-elite power struggles (Sumner and Gandhi)) that may result in different decisions by investors even in the same political regime. As for international institutions, Kerner looks closer into BITs and stresses how a particular type of a clause (umbrella clause) designed to guarantee strong investor protections can in fact discourage investors from relying on it. Addressing both domestic and international institutions, Park also shows not all democratic (or nondemocratic) host governments make the same decision with respect to different strengths of ISDS mechanisms in their BITs.

These papers will also add to the conference with their disparate methodologies and data. All four papers empirically test their theories using quantitative methods. In addition, Park also uses a formal model to show how a host country’s decision to offer ISDS is endogenized as a result of the strength of domestic institution. Regarding data, Barry uses new firm-level data while Sumner and Gandhi combine the cross-sectional data on foreign subsidiaries with their original country-level data on power consolidation.

Put together, these four papers represent a thoughtful inquiry into the role of both domestic and international institutions on foreign investment. They highlight new attributes and processes through which institutions can affect decisions of actors relevant to foreign investment. Moreover, these papers speak to a broader audience of international relations, comparative politics, and those who study the intersection of domestic and inter-state politics.

Sub Unit

• Division 16: International Political Economy

Individual Presentations

• Preserving FDI: Institutions, Crisis, and Exit - Colin Barry

• Perilous or Predictable? Foreign Investment in Personalist Regimes - Jane Lawrence Sumner, University of Minnesota, Twin Cities; Jennifer Gandhi, Emory University

• Investment Dispute Settlement Mechanism and Domestic Institutions - Yeon Kyung Park, Bogazici University

• Can Independence Induce Compliance in International Organizations? - Zoe Xincheng Ge, New York University

• The Effects of Chinese FDI on Political Leaders’ Approval in Host Countries - Elena V. McLean, SUNY, University at Buffalo; Jeheung Ryu, Kookmin University

Chair

• Rachel Wellhausen University of Texas at Austin

Discussant

• Sarah Bauerle Danzman Indiana University