Foreign Direct Investment and Bilateral Investment Treaties

Question 1

Domestic Institutions and FDI - Jensen

Answer 1

How do countries persuade MNCs to cooperate and invest in them?
- Conventional wisdom is that MNCs prefer to invest in autocratic regimes because authoritarian leaders can provide multinational firms better entry deals because they don’t have to deal with public opinion
- This relationship should lead to higher levels of FDI to authoritarian countries

• But since investment has risks (nationalization, capital controls, devaluations, etc.)
• Governments face a time inconsistency problem (authoritarian regimes can create attractive policies and then when they have FDI invested they can reverse them and keep more of the profits)
• So MCNs require credible commitments and democratic governments can be more stable because of (audience costs, veto players, and property rights protections)

Criticisms
- This is not necessarily true for all autocratic regimes, for example there are leaders who have been in power for many years so they have less incentive to switch their policies because it will harm them in the future because no one will invest anymore

Question 2

Elkens et al. - Why do countries sign BITs:
Coercion

Answer 2

• Developed countries are “at the service” of MCNs
• MCNs pressure their governments to sign BITs, then pressure foreign governments, and pressure their governments to pressure foreign governments
• All BITs are very similar in content, and countries with IMF programs are more likely to sign BITs
• Not necessarily true because the DSM are systemically different, and capital-importing states lead the movement

Question 3

FDI and Cooperations

Answer 3

• FDIs are a form of cooperation between non-state actors (MCNs) and states
• MCNs skip tariffs, cut transportation costs, and get cheap labor

1. FDI has grown dramatically over the past three decades
2. MNCs are the most productive firms in the international economic system
3. MNCs are involved in a complex number of activities
4. Investment policies have become more business-friendly over time

Question 4

Explaining the Increase of FDI

Answer 4

• Privatization
• Policies to protect investment have increased (IP rights)

Question 5

Why do countries sign Bilateral Investment treaties?

Answer 5

• BITs reduce the “policy space” for South governments, why would countries want to constrain their sovereignty?

Question 6

Elkens et al. - Why do countries sign BITs:
Competition

Answer 6

• BITs are a credibility device, it help governments prove they can be trustworthy with investments
• Leads to precise commitments, dispute settlement provisions, and obligations to follow the agreement
• BITs can be used to signal, they are costly so if countries sign them then they are willing to follow through
  -BITs also diffuse among countries competing for capital, the diffusion is stronger if the competition is more intense

Question 7

Why do countries sign BITs:
Learning

Answer 7

• Countries learn from successful policy, if another country has signed a BIT and it worked out for them then it should work for us as well

Question 8

Why do countries sign BITs:
Emulation

Answer 8

• Constructivist perspective, its the right way to do it so we should just sign it blindly
• “Logic of Appropriateness” guides action, evidenced
  by data that propensity to adopt was driven by peer pressure

Question 9

Why do countries sign BITs:
Bounded Rationality

Answer 9

• Similar to emulation, but it involves a cost-benefit analysis but there is a bound to their rational thinking
• Decision makers can only rely on the information available to them
• The information is often biased so they will make a decision that falls within their logical framework
• Example, South Africa had experience with FDI and considerable expertise, but when legal officers were presented with BITs they signed off on treaties that contradicted their own constitution because officials wanted to believe they would work

Question 10

Why are BITs and PTAs important?

Answer 10

1. They can be used as a signalling mechanism because negotiation and signing costs are high, so willingness to pay this cost signals security
2. Commitment device (ex post cost)
   - They include binding commitments that incur consequences if broken

Question 11

Do BITs matter?

Answer 11

• Short answer is not really
• FDI is more affected by reputation, if a country has a ICSID filing or ruling against them their FDI will reduce, but the effect of actually having a BIT is small
• PTAs are more effective since they include most of the same investment protections as BITs, and they include tariff reductions which increase FDI more
• So BITs are more of a defensive policy from the competitive perspective, to keep the FDI that countries already have
• Also BITs only affect investments in fixed capital, not in liquid assets since the former are more risky and can be affected more by negative policy decisions