The Politics of Foreign Direct Investment into Developing Countries: Increasing FDI through International Trade Agreements?

Authors


  • For comments on previous versions of this article, we are grateful to Nancy Brune, Mark Buntaine, Kevin Davis, Jeff Frieden, Joanne Gowa, Joseph Grieco, Nate Jensen, Judith Kelley, Thomas Kenyon, Benedict Kingsbury, Quan Li, Eddy Malesky, Mark Manger, Guillermo Rosas, Shanker Satyanath, Andrew Sobel, and participants of presentations at APSA 2004; Duke University; University of California, San Diego; Washington University; New York University School of Law; and Stanford Law School, as well as the editor and anonymous reviewers of AJPS. We thank Nancy Brune, Jose Antonio Cheibub, Zach Elkins, Witold Henisz, Jon Pevehouse, Beth Simmons, WDI, and UNCTAD for making data available to us; and we thank Matt Fehrs, Tom Kenyon, Ivan Savic, and especially Raymond Hicks for research assistance.

Tim Büthe (corresponding author) is assistant professor of political science, Duke University, on leave 2007–09 while a RWJ Foundation Research Scholar at the University of California, Berkeley; 303 Perkins Library, Duke University, Durham, NC 27708-0204 (buthe@duke.edu; http://www.buthe.info). Helen V. Milner is B. C. Forbes Professor of Politics and International Affairs at Princeton University, chair of its Department of Politics and director of the Niehaus Center for Globalization and Governance at Princeton's Woodrow Wilson School, 431 Robertson Hall, Princeton University, Princeton, NJ 08544 (hmilner@princeton.edu; http://www.princeton.edu/~hmilner/).

Abstract

The flow of foreign direct investment into developing countries varies greatly across countries and over time. The political factors that affect these flows are not well understood. Focusing on the relationship between trade and investment, we argue that international trade agreements—GATT/WTO and preferential trade agreements (PTAs)—provide mechanisms for making commitments to foreign investors about the treatment of their assets, thus reassuring investors and increasing investment. These international commitments are more credible than domestic policy choices, because reneging on them is more costly. Statistical analyses for 122 developing countries from 1970 to 2000 support this argument. Developing countries that belong to the WTO and participate in more PTAs experience greater FDI inflows than otherwise, controlling for many factors including domestic policy preferences and taking into account possible endogeneity. Joining international trade agreements allows developing countries to attract more FDI and thus increase economic growth.

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