International Investment Agreements and FDI Heterogeneity:
Industry Evidence from Japanese Multinational Companies
November 2008
Abstract
This paper analyzes the impact of international trade and investment agreements on foreign direct investment (FDI) activities of Japanese multinationals in developing and emerging economies. Based on transaction cost economics and institutional theory it contributes to the existing empirical literature by distinguishing treaty impact by the size and the asset specificity of the FDI activities. FDI activities are measured as the foreign affiliate employment of Japanese multinational companies aggregated on the industry and host country level. The importance of sunk costs, captured through the size of the affiliates included in the FDI aggregation, for explaining bilateral investment treaty (BIT) effectiveness is shown, but a significant role of the industry averaged R&D intensity of the parent firms, as the measure for asset specificity, for BIT effectiveness is not identified. In the case of preferential trade and investment agreements (PTIAs) concluded by other countries, not involving Japan, a different set of mechanisms is uncovered: smaller sized Japanese affiliates seem to be the ones that gain substantially more from the agreements than the large ones. Also, a link between asset specificity and PTIA effectiveness is established.
