Book Description

"My dissertation is motivated by the question, "In an era of ever-increasing global economic integration, why do some developing countries continually struggle to attract foreign direct investment (FDI)?" I explain this phenomenon by highlighting the interaction between international law and domestic institutions, and illustrating how this dynamic affects FDI in developing countries. My methods involve large-N quantitative analyses of developing countries, supported by case studies. The first chapter, "The Effects of Federalism and decentralization on the Business Environment for Foreign Direct Investment," shows that while developing countries often sign bilateral investment treaties (BITs) to commit to a stable policy environment, the effectiveness of these treaties in improving policy stability is reduced by federalism and decentralization. According to international law, national governments are legally responsible for any BIT violations that occur within their territories, even when the violation was committed by a subnational-level government. One implication of this is that when foreign investors initiate international arbitration claims over alleged BIT violations, the respondents are always national governments. This gives subnational governments weaker incentives than national governments to comply with BITs, which decreases the effectiveness of BITs in promoting policy stability in countries where subnational governments are relatively powerful. The second chapter, "Can Rational Choice Explain Bilateral Investment Treaties? How Lack of Legal Capacity Affects BIT Signing," argues that a country's legal capacity affects its ability to fully evaluate the consequences of BITs. I show that countries with federal and decentralized governments are more likely to be embroiled in international investment disputes over alleged violations of BITs, but that only countries with higher legal capacity are likely to adjust for this increased risk by signing fewer BITs. This demonstrates that a country's ability to behave in a "rational" manner when signing international treaties is dependent on its level of legal expertise. The third chapter, "The Effects of Judicial Independence on Foreign Direct Investment and International Arbitration Laws," studies how developing countries with institutional disadvantages use international alternatives to promote FDI, and how this differs by regime type. I show that in democratic countries, a decrease in judicial independence is associated with lower FDI inflows. Countries facing this problem respond by being more likely to adopt laws that provide investors with the option of international arbitration. These patterns are, however, not observed in autocratic countries. This is because in autocratic countries, the government can provide foreign investors with opportunities to collude with the government and extract rents at the expense of the public, making them less dependent on judicial independence to attract FDI"--Pages vii-ix.