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

Abstract

International trade agreements can help developing countries attract foreign direct investment. We ask whether differences in the specific provisions included in trade agreements have differential effects on FDI. Can trade agreements with more credible commitments to protect investment induce more FDI than other agreements? We explore four institutional differences among preferential trade agreements (PTAs). We first examine whether those that have entered into force lead to greater FDI than PTAs that have merely been negotiated and signed. Second, do trade agreements that have investment clauses lead to greater FDI? Third, we examine the impact of dispute settlement mechanisms in PTAs. Turning to multilateral agreements, we differentiate the GATT from the WTO, since the latter allows member states to commit more credibly to more comprehensive obligations. Analyses of FDI flows into 125 developing countries from 1971 to 2007 show that more FDI is induced by trade agreements that include stronger mechanisms for credible commitment. Institutional diversity in international agreements matters.

Keywords: foreign direct investment, trade agreements, GATT, WTO, international institutions, credibility, commitments, governance, PTAs