Published online by Cambridge University Press: 28 November 2012
This article argues that the political risk associated with foreign direct investment (FDI) is primarily a function of investment in fixed-capital, and not a homogeneous feature of FDI. As such, empirical tests of a political institution's ability to mitigate political risk should focus directly on investments in fixed capital and not on more highly aggregated measures of multinational corporation (MNC) activity, such as FDI flow and stock data that are affected by the accumulation of liquid assets in foreign affiliates. We apply this to the study of bilateral investment treaties (BITs). We find that BITs with the United States correlate positively with investments in fixed capital and have little, if any, correlation with other measures of MNC activity.
Department of Political Science, University of Michigan (email: firstname.lastname@example.org); Department of Political Science, Emory University. The authors would like to thank seminar participants at the University of Michigan and those who attended the relevant session at the 2010 APSA convention for their advice.
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28 Investments in illiquid assets are likely to beget increases in liquid assets, so a positive relationship between BITs and non-PPE and Total Assets might be expected. However, investments in illiquid capital might be financed by reallocating capital away from liquid forms without any new capital actually being introduced into the foreign affiliate. This would suggest a negative relationship between BITs and non-PPE and a non-relationship with Total Assets. We do not have a theory to guide our expectations on these matters.
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32 Much of this remaining missing data results from the BEA not being able to disclose financial information for country-year pairings in which a single MNC was operating as doing so would violate confidentiality.
33 The quickest a BIT with the United States has moved from signing to entry into force is 358 days (Kyrgyzstan), and the vast majority of BITs enter into force within 2–5 years of signing. Even when entry into force in the near future is practically assured, the process through which that happens typically takes several months to a year. A signed US BIT must be transmitted to the US Senate, receive a hearing in the Committee on Foreign Relations, move back to the Senate for a resolution of advice and consent to ratification, have its instruments of ratification signed by the president and then wait thirty days before it enters into force. The US–Honduras BIT, which is typical in this regard, had been ratified by the Honduran government by 1999 and was submitted to the US Senate for ratification on 23 May 2000. Hearings on the treaty were held on 13 September 2000, and the vote for ratification was taken on 18 October 2000. The treaty finally entered into force on 11 July 2001. There is occasionally the additional step of reconciling divergent translations across versions of the treaty ratified in each country. This process took an additional two years in the case of the US–Jordan BIT. See http://www.jordanembassyus.org/new/aboutjordan/uj4.shtml.
34 The results of these models are available from the authors on request.