A Bit Far? Geography, International Economic Agreements, and Foreign Direct Investment: Evidence from Emerging Markets

Abstract

How do international economic agreements influence the investment patterns of firms from emerging economies? This paper studies the ways in which bilateral investment treaties and preferential trade agreements interact with geographic and cultural distance to influence firms' investment patterns. How does geographic and cultural proximity affect the impact of international economic agreements on foreign direct investment flows? This question is answered using data from an original survey of 700 firms from four emerging (or newly-emerged) economies: Brazil, India, the Republic of Korea, and South Africa. The findings suggest that bilateral investment treaties and preferential trade agreements increase the likelihood of foreign direct investment. Yet, the effects of these agreements on foreign direct investment depend on the distance between the origin and potential destination countries. Moreover, trade and investment agreements appear to interact differently with distance. By providing guarantees to investors and signaling credible commitment from host governments, bilateral investment treaties mitigate the higher uncertainty and transaction costs associated with investing in faraway, unfamiliar markets. By contrast, the investment attraction effectiveness of preferential trade agreements fades with distance.

Keywords: International Trade and Trade Rules, Regulatory Regimes, Treaties, Legal Products, Legislation, Legal Reform, Social Policy, Judicial System Reform, International Law, Transport Services, Construction Industry, Common Carriers Industry, Food & Beverage Industry, General Manufacturing, Pulp & Paper Industry, Textiles, Apparel & Leather Industry, Business Cycles and Stabilization Policies, Plastics & Rubber Industry, Transport and Trade Logistics