Protecting home: how firms’ investment plans affect the formation of bilateral investment treaties

Abstract

It is commonly accepted that developing countries pursue the creation of bilateral investment treaties (BITs) to attract foreign direct investment (FDI). However, it is relatively unknown what role developed countries play in the creation of BITs. When negotiating FDI deals, multinational corporations (MNCs) anticipate potential investment disputes between themselves and the host government. MNCs seek to reduce future investment risks, and asking their own government to secure BITs with the host country is an attractive option for doing so. To test my argument about capital-exporting actors influencing BITs, I analyze FDI project announcement data, which captures the timing of when MNCs finalize their plans to engage in FDI. The findings show that MNCs’ already-planned FDI is strongly associated with the probability of subsequent BIT signing between the home and host country. Moreover, by matching firm-level financial information with FDI project announcements, I show that home countries are more likely to establish BITs with host countries when large firms are the source of the planned FDI. These findings suggest that BIT creation is not driven solely by host countries’ economic needs, but also by home countries’ desire to protect their politically privileged firms.