1. International Investment Agreements as Signals: Their Effects on FDI Flows
Tatiana Vashchilko
Pennsylvania State University
Presentation prepared for the EITM Summer School
July 19, 2007

2. Research Question
What are the effects of the design of international investment agreements (IIAs) on the choice of FDI location?
“There can be a little doubt about the fact that foreign investment law has become global – a global society where goods and capitals flow every passing day with fewer restrictions” (Vicuna 2005, p.98).

3. Stylized Facts
Second half of the 20th century – period of establishment of international trade law system
The beginning of 21st century – period of establishment of international investment law system
Multilateral agreements (11)
Regional agreements (129)
Bilateral agreements (5344)
Soft law documents (45)
The case law of international tribunals (226)
Two periods of significant increase in FDI
1992 – 1997
2002 – present

4. Foreign Investor – Host State
Conflict of interests between foreign investors and host states over the control of foreign investments
Dynamic inconsistency problem
Host states commit to certain treatment of foreign investments

5. Political Determinants of FDI
Domestic politics and FDI
(Oneal 1994, Li and Resnick 2003, Jensen 2003, Li 2006)
International factors and FDI
(Hallward-Driemeier 2003, Buthe and Milner 2006, Neumayer and Spess 2005, Elkins, Guzman and Simmons 2006)
Potential gaps: variation in IIAs
No account for possible heterogeneity in IIAs
Presence/absence or the total number of IIAs
Effect of a single institution rather than the effect of the set of institutions

6. Argument
Content of IIAs serves as the signal about the productivity of investment environment in host states
Content of IIAs differ across legal certainty dimension
the obligations of IIAs are written with more or less certainty level
The more certain the IIAs are, the more FDI host states attract

7. Signaling Theory
Investor’s beliefs about investment environment given IIA’s (un)certainty levels are formed
Empirical joint distribution of investment environment and IIA’s (un)certainty becomes known – determined after FDI undertaken
Investment schedule, which includes the amounts of FDI with corresponding levels of IIA’s (un)certainty, is generated
Host states choose appropriate IIA’s (un)certainty levels
Host states realize their opportunity costs of concluding IIAs with different (un)certainty levels
Figure 2 IIAs Design – FDI flows cycle in the Investment Signaling Model

8. Signaling Theory: Equilibrium
The host states with bad investment environment have higher opportunity costs of signing certain IIAs than does the host states with good investment environment
Separating equilibrium exists, which means different host state types send different signals and attract different levels of FDI

9. Summary
Variations in IIAs along (un)certainty dimension resolve differently dynamic inconsistency problem
Variations in IIAs send different signals to foreign investors about FDI environment and, ceteris paribus, lead to different levels of FDIs

10. Suggestions Content analysis of 250 BITs
Possible ways of measuring the (un)certainty dimension in IIAs?
Possible ways of testing the signaling theory of the effects of the content of IIAs on FDI flows? (Case studies vs Large N)