International Investment Agreements as Signals: Their Effects on FDI Flows Tatiana Vashchilko Pennsylvania State University tvv105@psu.edu Presentation prepared for the EITM Summer School July 19, 2007

Research Question What are the effects of the design of international investment agreements (IIAs) on the choice of FDI location? “There can be a little doubt about the fact that foreign investment law has become global – a global society where goods and capitals flow every passing day with fewer restrictions” (Vicuna 2005, p.98).

Stylized Facts Second half of the 20th century – period of establishment of international trade law system The beginning of 21st century – period of establishment of international investment law system Multilateral agreements (11) Regional agreements (129) Bilateral agreements (5344) Soft law documents (45) The case law of international tribunals (226) Two periods of significant increase in FDI 1992 – 1997 2002 – present

Foreign Investor – Host State Conflict of interests between foreign investors and host states over the control of foreign investments Dynamic inconsistency problem Host states commit to certain treatment of foreign investments

Political Determinants of FDI Domestic politics and FDI (Oneal 1994, Li and Resnick 2003, Jensen 2003, Li 2006) International factors and FDI (Hallward-Driemeier 2003, Buthe and Milner 2006, Neumayer and Spess 2005, Elkins, Guzman and Simmons 2006) Potential gaps: variation in IIAs No account for possible heterogeneity in IIAs Presence/absence or the total number of IIAs Effect of a single institution rather than the effect of the set of institutions

Argument Content of IIAs serves as the signal about the productivity of investment environment in host states Content of IIAs differ across legal certainty dimension the obligations of IIAs are written with more or less certainty level The more certain the IIAs are, the more FDI host states attract

Signaling Theory Investor’s beliefs about investment environment given IIA’s (un)certainty levels are formed Empirical joint distribution of investment environment and IIA’s (un)certainty becomes known – determined after FDI undertaken Investment schedule, which includes the amounts of FDI with corresponding levels of IIA’s (un)certainty, is generated Host states choose appropriate IIA’s (un)certainty levels Host states realize their opportunity costs of concluding IIAs with different (un)certainty levels Figure 2 IIAs Design – FDI flows cycle in the Investment Signaling Model

Signaling Theory: Equilibrium The host states with bad investment environment have higher opportunity costs of signing certain IIAs than does the host states with good investment environment Separating equilibrium exists, which means different host state types send different signals and attract different levels of FDI

Summary Variations in IIAs along (un)certainty dimension resolve differently dynamic inconsistency problem Variations in IIAs send different signals to foreign investors about FDI environment and, ceteris paribus, lead to different levels of FDIs

Suggestions Content analysis of 250 BITs Possible ways of measuring the (un)certainty dimension in IIAs? Possible ways of testing the signaling theory of the effects of the content of IIAs on FDI flows? (Case studies vs Large N)