Are Stricter Investment Rules Contagious? Host Country Competition for Foreign Direct Investment Through International Agreements

Review of World Economics, 152 (1), 2016, pp. 177-213

58 Pages Posted: 20 Mar 2015 Last revised: 29 Feb 2016

See all articles by Eric Neumayer

Eric Neumayer

London School of Economics and Political Science (LSE)

Peter Nunnenkamp

University of Kiel

Martin Roy

World Trade Organization (WTO) - Trade in Services Division

Date Written: March 18, 2015

Abstract

We argue that competitive diffusion is a driver of the trend toward international investment agreements (IIAs) with stricter investment rules, namely defensive moves of developing countries concerned about foreign direct investment (FDI) diversion in favor of competing host countries. Accounting for spatial dependence in the formation of bilateral investment treaties (BITs) and preferential trade agreements (PTAs) that contain investment provisions, we find that the increase in agreements with stricter provisions on investor-state dispute settlement and pre-establishment national treatment is a contagious process. Specifically, a developing country is more likely to sign an agreement with weak investment provisions if other developing countries that compete for FDI from the same developed country have previously signed agreements with similarly weak provisions. Conversely, contagion in agreements with strong provisions exclusively derives from agreements with strong provisions that other FDI-competing developing countries have previously signed with a specific developed source country of FDI.

Keywords: bilateral investment treaties, preferential trade agreements, investment provisions, competition for FDI, spatial dependence

JEL Classification: F21, F53

Suggested Citation

Neumayer, Eric and Nunnenkamp, Peter and Roy, Martin, Are Stricter Investment Rules Contagious? Host Country Competition for Foreign Direct Investment Through International Agreements (March 18, 2015). Review of World Economics, 152 (1), 2016, pp. 177-213. Available at SSRN: https://ssrn.com/abstract=2580108 or http://dx.doi.org/10.2139/ssrn.2580108

Eric Neumayer

London School of Economics and Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 207 955 7598 (Phone)
+44 207 955 7412 (Fax)

HOME PAGE: http://personal.lse.ac.uk/neumayer

Peter Nunnenkamp (Contact Author)

University of Kiel ( email )

D-24100 Kiel
Germany

Martin Roy

World Trade Organization (WTO) - Trade in Services Division ( email )

Centre William Rappard
Rue de Lausanne 154
12111 Geneva
Switzerland

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