Abstract

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 (pta s), 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 pta s that have entered into force lead to greater fdi than pta s 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 pta s 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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