Abstract:
The competition for foreign direct investment (FDI) has resulted in many
developing countries resorting to international investment agreements (IIAs) as a legal
mechanism to encourage FDI based on the basis that these international commitments are
more credible than domestic policy choices for the cost of reneging on them is more
costly. IIAs are legal instruments that contain a set of rules governing FDI and specifying
the rights and obligations of foreign investors, investing countries and recipient countries.
The proliferation of IIAs over the years illustrates the belief of the policymakers in the
efficacy of these policy instruments in helping to attract FDI. However, there is still very
limited empirical evidence to support the claim of their positive role. The aim of the
research is to contribute to the existing empirical literature on FDI by incorporating
international FDI policies that to date have not yet been thoroughly studied. It employs
Dunning’s ownership-location-internalization (OLI) framework to investigate the extent
to which investment agreements play a role in attracting FDI inflows from within
ASEAN and outside ASEAN to the countries and compare these influences with those of
other macroeconomic and institutional factors over time. The analysis is undertaken using
a panel data set covering ten ASEAN countries over the period 1980-2005. The findings
demonstrate that BITs or the bilateral type of IIAs made with developed countries have a
positive impact on FDI inflows into ASEAN countries and confirm the crucial role
played by the quality of domestic institutions. The results are robust to changes in model
specification. The empirical results also indicate that BITs function as a complement
rather than a substitute for domestic institutional quality. However, there is no evidence
that the ASEAN Investment Area, which is a regional type of IIA made among ASEAN
nations serves to stimulate intra-regional or inter-regional FDI flows to the region.
