Does Joining International Treaties Attract Foreign Investment? Experimental Firm-Level Evidence

What actions can governments in developing countries take to make their economies more appealing to foreign investors? One increasingly prominent answer focuses on the effect of signing onto international economic agreements, showing that countries’ participation in investment and trade treaties is associated with greater inflow of FDI. Yet the nature of this empirical relationship remains unclear: Is it causal, and if so, by what mechanism does signing onto such international treaties attract foreign capital? This study uses experimental data from an original cross-national survey of firms to explore these questions. Our results indicate that membership in international economic treaties has an unambiguous causal impact on increasing the perceived attractiveness of a developing country in the eyes of potential foreign investors. The analysis suggests that the premium in perceived attractiveness of a potential location is driven mostly by the market-enhancing opportunities that the treaties provide. However, we find little evidence in support of other purported mechanisms, including the oft-made claim that signing of international agreements attracts foreign investment by serving as an effective commitment device that constrains ex-post opportunistic behavior by host countries.