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Foreign Direct Investment and Institutional Diversity in Trade Agreements: Credibility, Commitment, and Economic Flows in the Developing World, 1971–2007

Published online by Cambridge University Press:  29 December 2013

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Abstract

International trade agreements lead to more foreign direct investment (FDI) in developing countries. This article examines the causal mechanisms underpinning this trade-investment linkage by asking whether institutional features of preferential trade agreements (PTAs), which allow governments to make more credible commitments to protect foreign investments, indeed result in greater FDI. The authors explore three institutional differences. First, they examine whether PTAs that have entered into force lead to greater FDI than PTAs that have merely been negotiated and signed, since only the former constitute a binding commitment under international law. Second, they ask whether trade agreements that have investment clauses lead to greater FDI. Third, they consider whether PTAs with dispute-settlement mechanisms lead to greater FDI. Analyses of FDI flows into 122 developing countries from 1971 to 2007 show that trade agreements that include stronger mechanisms for credible commitment induce more FDI. Institutional diversity in international agreements matters.

Type
Symposium: The Regime for International Investment—Foreign Direct Investment, Bilateral Investment Treaties, and Trade Agreements
Copyright
Copyright © Trustees of Princeton University 2014 

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