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

  • Tim Büthe and Helen V. Milner

International trade agreements lead to more foreign direct investment (FDI) in developing countries. This article examines 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. The authors explore three institutional differences. First, they 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, they ask whether trade agreements that have investment clauses lead to greater FDI. Third, they consider whether PTAs with dispute-settlement mechanisms lead to greater FDI. Analyses of FDI flows into 122 developing countries from 1971 to 2007 show that trade agreements that include stronger mechanisms for credible commitment induce more FDI. Institutional diversity in international agreements matters.

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* For constructive criticisms on earlier versions, we thank Todd Allee, Leonardo Baccini, Stephen Chaudoin, Christina Davis, Joanne Gowa, Raymond Hicks, Amaney Jamal, Kris Johnson, Daniel Kono, Edmund Malesky, Ed Mansfield, Layna Mosley, Nate Jensen, Clint Peinhardt, Beth Simmons, Randy Stone, and members of the audience at a presentation at the annual meetings of the APSA and ISA, at Rochester and Yale Universities, and at the Conference on Multinationals in Krakow, June 2011, as well as the editors and reviewers for World Politics. We also thank Nancy Brune, Jose Antonio Cheibub, Witold Henisz, Jon Pevehouse, the World Bank (WDI), and UNCTAD for making data available to us; and Torben Behmer, Tammy Hwang, Danielle Lupton, and Raymond Hicks for research assistance.

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World Politics
  • ISSN: 0043-8871
  • EISSN: 1086-3338
  • URL: /core/journals/world-politics
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