(Too) Open For Business? The (Non-Linear) Influence of BITs and PTAs on FDI and Trade Marc L. Busch and Jennifer Tobin Georgetown University

(Too) Open For Business?(Too) Open For Business? The (Non-Linear) Influence of BITs and PTAs The (Non-Linear) Influence of BITs and PTAs

on FDI and Tradeon FDI and Trade

Marc L. Busch and Jennifer TobinGeorgetown UniversityGeorgetown University

MotivationMotivation

PuzzlePuzzle ArgumentArgument ModelModel ResultsResults

• The literature sees BITs and PTA credibly signaling that a developing country is “open for business”

• This leads to the hypothesis that more of either, but especially both, will increase inflows of FDI

• Yet, we find that the relationship between BITs and PTAs is non-linear

• We thus expect the relationship between BITs/PTAs and rates of growth of FDI and Trade to be non-linear as well

(Too) Open For Business?Busch and Tobin

Conventional WisdomConventional Wisdom


• The emerging consensus is that BITs and PTAs are complementary institutions

• Both seek to increase investment and trade by making commerce more predictable

• Not surprisingly, recent research finds that more BITs and PTAs lead to more FDI (Büthe and Milner 2008)


ArgumentArgument


• A North-South BIT increases the odds that a rich and poor government will sign a follow-on PTA

• However, if a poor government has too many BITs or PTAs with other rich ones, these odds decline

• Therefore, we conjecture that growth in FDI (and trade) will fall as a poor government signs more BITs and PTAs


MNCs, BITs and PTAsMNCs, BITs and PTAs


• Developed country MNCs looking to outsource to developing ones have two concerns:

1.Fear of (uncompensated) expropriation, leading them to demand a BIT

2.Transaction costs of getting inputs to/exports from an affiliate, leading them to demand a PTA


Rich Governments, BITs and PTAsRich Governments, BITs and PTAs


• BITs impose few additional costs on developed countries, as their courts can handle investor disputes

• In contrast, PTAs typically involve deeper and reciprocal obligations that are often permanent

• Rich governments are likely to supply PTAs if MNCs politically reward them for the “exporter rents” that preferential trade agreements sponsor


Exporter RentsExporter Rents


• Exporter rents: profits not competed away because of preferences (Grossman and Helpman 1995; Krishna 1998)

• Even where PTAs are offered for non-economic reasons, exporter rents are still crucial (Limão 2002)

• Exporter rents are “crowded out” where the number of BITs and PTAs give everyone access


Poor Governments, BITs and PTAsPoor Governments, BITs and PTAs


• BITs valued as a means of lowering the domestic cost of capital, and as precursors to trade agreements

• Yet, poor governments also pursue non-economic goals through BITs and PTAs: i.e., human rights, democracy

• As a result, they often sign more agreements than MNC would prefer, hurting the prospect of FDI (and trade)


HypothesisHypothesis


The more BITs and PTAs a poor government has signed with other rich ones, the lesser will be its growth in FDI

The more BITs and PTAs a poor government has signed with other rich ones, the lesser will be its growth in Trade


Econometric IssuesEconometric Issues


• Missing Data: use Amelia to impute missing data

• Serial correlation: use natural spline function

• Endogeneity: use system GMM for FDI models and propensity-score matching for trade models


• sum of BITs, BITssum of BITs, BITs22

•sum of PTAs, PTAssum of PTAs, PTAs22

•IncomeIncome

•Income GrowthIncome Growth

•OpennessOpenness

Model of FDI ChangeModel of FDI Change

QuestionQuestion ArgumentArgument ModelModel ResultsResults

•GATT/WTO MemberGATT/WTO Member

• Political RiskPolitical Risk

• PopulationPopulation

• Natural ResourcesNatural Resources

VariablesVariables


• BIT, sum of BITs, BITsBIT, sum of BITs, BITs22

• PTA, sum of PTAs, PTAsPTA, sum of PTAs, PTAs22

• DistanceDistance

• Skill-DifferenceSkill-Difference

• Income-DifferenceIncome-Difference

Gravity Model of TradeGravity Model of Trade

QuestionQuestion ArgumentArgument ModelModel ResultsResults

•Alliance MemberAlliance Member

• GATT/WTO MemberGATT/WTO Member

• Polity ScorePolity Score

• PopulationPopulation

• Regional dummiesRegional dummies

VariablesVariables


The Effect of Having Too Many TreatiesThe Effect of Having Too Many Treaties

PuzzlePuzzle ArgumentArgument ModelModel ResultsResults(Too) Open For Business?Busch and Tobin

FDI

BITs 5

PTAs 7

Trade

BITs 12

PTAs 8

Tipping Points

The Effect of Having Too Many BITs on FDIThe Effect of Having Too Many BITs on FDI

QuestionQuestion ArgumentArgument ModelModel ResultsResults(Too) Open For Business?Busch and Tobin

-0.400

-0.350

-0.300

-0.250

-0.200

-0.150

-0.100

-0.050

0.000

0.050

0.100

0.150

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

BITs

Cha

nge

in F

DI

Conditional Effect of an Additional BIT on Change in FDI:Accounting for Non-Linear Relationship

The Effect of Having Too Many PTAs on FDIThe Effect of Having Too Many PTAs on FDI


Conditional Effect of an Additional PTA on Change in FDI: Accounting for Non-Linear Relationship

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

PTAs

Cha

nge

in F

DI

The Effect of Having Too Many BITs on TradeThe Effect of Having Too Many BITs on Trade


Conditional Effect of an Additional BIT on Change in Trade: Accounting for Non-Linear Relationship

-1.500

-1.000

-0.500

0.000

0.500

1.000

1.500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

BITs

Per

cent

Cha

nge

in T

rade

The Effect of Having Too Many PTAs on TradeThe Effect of Having Too Many PTAs on Trade


-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

PTAs

Per

cent

Cha

nge

in T

rade

Conditional Effect of an Additional PTA on Change in Trade: Accounting for Non-Linear Relationship

ConclusionConclusion

ImplicationsImplications

• More BITs and/or PTAs is not necessarily better

- Signaling that the country is “open for business” must be balanced against concerns for exporter rents

• Poor governments need to be more selective

- In pursuit of BITs and PTAs, the question of which North-South institutions to build on must be asked


Documents

(Too) Open For Business? The (Non-Linear) Influence of BITs and PTAs on FDI and Trade Marc L. Busch and Jennifer Tobin Georgetown University