Institutional Diversity in Trade Agreements and Their Effect on Foreign Direct Investment: Credibility, Commitments, and Economic Flows in the Developing World, 1971-2007
International trade agreements lead to more foreign direct investment (FDI) in developing countries. We examine the causal mechanisms underpinning this trade-investment linkage by asking whether institutional features of preferential trade agreements (PTAs), which allow governments to make more credible commitments to protect foreign investments, indeed result in greater FDI. We explore three such institutional differences. We first examine whether PTAs that have entered into force lead to greater FDI than PTAs that have merely been negotiated and signed since only the former constitute a binding commitment under international law. Second, do trade agreements that have investment clauses lead to greater FDI? Third, do PTAs with dispute settlement mechanisms lead to greater FDI? Analyses of FDI flows into 122 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.
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