Foreign direct investment and bilateral investment treaties: An international political perspective

Abstract

Most of the literature dealing with the location of foreign direct investment (FDI) has ignored the fact that multinational enterprises (MNE) are not stateless and that their activities take place within an international political system: the return on their FDI can be greatly in uenced by the quality of interstate political relations between their home and host countries. This paper investigates whether the quality of interstate political relations between countries in uences the volume of bilateral FDI. Thanks to the construction of a new indicator of the quality of interstate political relations, it is found that better interstate political relations foster bilateral FDI, though the signature of a bilateral investment treaty (BIT) may dampen the impact of their uctuations. In addition, the e ect of a variation in the quality of domestic institutions increases with the entry into force of a BIT, suggesting that the latter signals the credibility of an institutional improvement. Overall, when both indirect e ects are considered, the entry into force of a BIT increases bilateral FDI stocks by 16%, on average, a lower impact than those found in previous studies. This e ect nevertheless signi cantly di ers according to the quality of both interstate political relations and domestic institutions. Résumé: La littérature sur la localisation des investissements directs à l'étranger (IDE) ignore, en grande partie, le fait que les entreprises multinationales ne sont pas apatrides et que leurs activités prennent place dans le système politique international. Leur retour sur investissement peut ainsi être grandement a ecté par la qualité des relations politiques entre leur pays d'origine et le pays hôte de leurs investissements. Cet article étudie dans quelle mesure la qualité des relations politiques entre Etats in uence le volume des IDE bilatéraux. En construisant un nouvel indicateur de la qualité des relations politiques internationales, nous montrons qu'entretenir de bonnes relations politiques favorise les IDE bilatéraux. La signature d'un traité bilatéral d'investissement (TBI) limite cependant la pertinence des relations politiques pour les décisions d'investissement. Par ailleurs, l'e et d'une amélioration des institutions domestiques augmente avec l'entrée en application d'un TBI, ce qui suggère que ces accords signalent la crédibilité des institutions domestiques. Dans l'ensemble, lorsque ces deux e ets sont pris en compte, l'entrée en vigueur d'un TBI augmente les stocks bilatéraux d'IDE de 16% en moyenne, un impact moins important que ceux trouvés dans les études précédentes. L'ampleur de cet e et varie cependant beaucoup selon la qualité des relations politiques entre Etats et des institutions domestiques.Mots clés : Investissement direct à l'étranger, Relations politiques internationales, Traités bilatéraux d'investissement, Institutions. JEL classi cation: F21, F53, F59 * We thank Keith Head, Thierry Mayer and Ian Wooton for their helpful comments. A previous version of the paper, entitled Being...

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