What's the Risk? Bilateral Investment Treaties, Political Risk and Fixed Capital Accumulation

Abstract

This article argues that the political risk associated with foreign direct investment (FDI) is primarily a function of investment in fixed-capital, and not a homogeneous feature of FDI. As such, empirical tests of a political institution's ability to mitigate political risk should focus directly on investments in fixed capital and not on more highly aggregated measures of multinational corporation (MNC) activity, such as FDI flow and stock data that are affected by the accumulation of liquid assets in foreign affiliates. We apply this to the study of bilateral investment treaties (BITs). We find that BITs with the United States correlate positively with investments in fixed capital and have little, if any, correlation with other measures of MNC activity.Foreign direct investment (FDI) is thought to be an especially risky form of investment because its ex post illiquidity allows host-state governments to renegotiate the terms of an investment without triggering capital flight. 1 This dynamic is often referred to as the 'obsolescing bargain', or, more generally, 'political risk'. 2 Political scientists often ask whether certain institutional arrangements can alleviate political risk (and increase FDI) by rendering such renegotiations procedurally difficult or politically unwise. 3 Knowing whether or not political institutions have this effect is an important research agenda, not only for what it reveals about the effects of political institutions, but because institutional environments that fail to provide adequate checks against predatory behaviour by host governments lead to less FDI, with the attendant detrimental effects on capital accumulation, employment and economic growth.Bilateral investment treaties (BITs) have received particular attention in this literature. BITs secure a set of clearly defined rights for multinational investors and subject host

Bilateral Investment Treaties and Foreign Direct Investment: Evidence of Asymmetric Effects on Vertical and Horizontal Investments

“…These findings imply that BITs promote both vertical and horizontal FDI by indicating a host country's sincerity to investment protection. The findings are consistent with those of Kerner and Lawrence (), Busse et al. (2011), Kerner () and Neumayer and Spess (), who all find evidence of a positive impact of the treaties on FDI.…”

Good for some, bad for others: US investors and non-trade issues in preferential trade agreements

“…Secondly, scholars used aggregated FDI data. This comes with the accompanying factor of measurement errors (For details on the measurement bias see Arel-Bundock 2016;Kerner 2014;Kerner and Lawrence 2014). Among other issues discrepancies in data-collection methods across countries, ignorance of debt funded assets, and the mix-up of the direct and the ultimate owner cause wrong data at the aggregated FDI-level.…”

The political determinants of foreign direct investment: a firm-level analysis

“…In Figure 1, the investment decision was unconditionally related to the size of the host economy (larger markets attract international investors). The top node of that tree could also be interpreted as embodying the (conditional) broad vs. narrow distinction from Mosley (2003, 37), where the author argues that international investors get more useful information by monitoring politics in the developing world rather than in developed economies.¹⁶ Figure 1 also accounts for the possibility that capital-intensive industries like mining may be more sensitive to property rights protection, an argument which is consonant with the work of Kerner and Lawrence (2014) and several others.…”