(Too) Open For Business? The (Non-Linear) Influence of BITs and PTAs on FDI and Trade Marc L. Busch and Jennifer Tobin Georgetown University

Motivation PuzzleArgumentModelResults The literature sees BITs and PTA credibly signaling that a developing country is “open for business” This leads to the hypothesis that more of either, but especially both, will increase inflows of FDI Yet, we find that the relationship between BITs and PTAs is non-linear We thus expect the relationship between BITs/PTAs and rates of growth of FDI and Trade to be non-linear as well (Too) Open For Business? Busch and Tobin

Conventional Wisdom PuzzleArgumentModelResults The emerging consensus is that BITs and PTAs are complementary institutions Both seek to increase investment and trade by making commerce more predictable Not surprisingly, recent research finds that more BITs and PTAs lead to more FDI ( Büthe and Milner 2008 ) (Too) Open For Business? Busch and Tobin

Argument PuzzleArgumentModelResults A North-South BIT increases the odds that a rich and poor government will sign a follow-on PTA However, if a poor government has too many BITs or PTAs with other rich ones, these odds decline Therefore, we conjecture that growth in FDI (and trade) will fall as a poor government signs more BITs and PTAs (Too) Open For Business? Busch and Tobin

MNCs, BITs and PTAs PuzzleArgumentModelResults Developed country MNCs looking to outsource to developing ones have two concerns: 1. Fear of (uncompensated) expropriation, leading them to demand a BIT 2. Transaction costs of getting inputs to/exports from an affiliate, leading them to demand a PTA (Too) Open For Business? Busch and Tobin

Rich Governments, BITs and PTAs PuzzleArgumentModelResults BITs impose few additional costs on developed countries, as their courts can handle investor disputes In contrast, PTAs typically involve deeper and reciprocal obligations that are often permanent Rich governments are likely to supply PTAs if MNCs politically reward them for the “exporter rents” that preferential trade agreements sponsor (Too) Open For Business? Busch and Tobin

Exporter Rents PuzzleArgumentModelResults Exporter rents: profits not competed away because of preferences ( Grossman and Helpman 1995; Krishna 1998 ) Even where PTAs are offered for non-economic reasons, exporter rents are still crucial ( Limão 2002 ) Exporter rents are “crowded out” where the number of BITs and PTAs give everyone access (Too) Open For Business? Busch and Tobin

Poor Governments, BITs and PTAs PuzzleArgumentModelResults BITs valued as a means of lowering the domestic cost of capital, and as precursors to trade agreements Yet, poor governments also pursue non-economic goals through BITs and PTAs: i.e., human rights, democracy As a result, they often sign more agreements than MNC would prefer, hurting the prospect of FDI (and trade) (Too) Open For Business? Busch and Tobin

Hypothesis PuzzleArgumentModelResults The more BITs and PTAs a poor government has signed with other rich ones, the lesser will be its growth in FDI The more BITs and PTAs a poor government has signed with other rich ones, the lesser will be its growth in Trade (Too) Open For Business? Busch and Tobin

Econometric Issues PuzzleArgumentModelResults Missing Data: use Amelia to impute missing data Serial correlation: use natural spline function Endogeneity: use system GMM for FDI models and propensity-score matching for trade models (Too) Open For Business? Busch and Tobin

sum of BITs, BITs 2 sum of BITs, BITs 2 sum of PTAs, PTAs 2 sum of PTAs, PTAs 2 Income Income Income Growth Income Growth Openness Openness Model of FDI Change QuestionArgumentModelResults GATT/WTO Member GATT/WTO Member Political Risk Political Risk Population Population Natural Resources Natural Resources Variables (Too) Open For Business? Busch and Tobin

BIT, sum of BITs, BITs 2 BIT, sum of BITs, BITs 2 PTA, sum of PTAs, PTAs 2 PTA, sum of PTAs, PTAs 2 Distance Distance Skill-Difference Skill-Difference Income-Difference Income-Difference Gravity Model of Trade QuestionArgumentModelResults Alliance Member Alliance Member GATT/WTO Member GATT/WTO Member Polity Score Polity Score Population Population Regional dummies Regional dummies Variables (Too) Open For Business? Busch and Tobin

The Effect of Having Too Many Treaties PuzzleArgumentModelResults (Too) Open For Business? Busch and Tobin FDI BITs5 PTAs7 Trade BITs12 PTAs8 Tipping Points

The Effect of Having Too Many BITs on FDI QuestionArgumentModelResults (Too) Open For Business? Busch and Tobin

The Effect of Having Too Many PTAs on FDI QuestionArgumentModelResults (Too) Open For Business? Busch and Tobin

The Effect of Having Too Many BITs on Trade QuestionArgumentModelResults (Too) Open For Business? Busch and Tobin

The Effect of Having Too Many PTAs on Trade QuestionArgumentModelResults (Too) Open For Business? Busch and Tobin

Conclusion Implications More BITs and/or PTAs is not necessarily better - Signaling that the country is “open for business” must be balanced against concerns for exporter rents Poor governments need to be more selective - In pursuit of BITs and PTAs, the question of which North-South institutions to build on must be asked (Too) Open For Business? Busch and Tobin