A primary concern for investors seeking to expand their portfolio in developing countries is whether disputes that arise with business partners will be resolved quickly and fairly in domestic courts. To address this concern, governments in developing countries often pass legislation and enter international agreements to establish mechanisms for commercial dispute resolution. This study is among the first to compare whether international or domestic agreements are more powerful in increasing foreign investor confidence—which could lead to an expansion in the scale and scope of foreign direct investment (FDI) activity and deepen foreign investors’ participation in global value chains (GVC).
Using a survey of 1,583 foreign investors in Vietnam, researchers found that international investment agreements have a larger positive impact on these investors’ views about current and future work than learning about government commitments in domestic law. Despite Vietnam’s increasing interest in participating in GVC and attracting FDI, its non-democratic, single-party regime causes tremendous challenges in terms of reassuring investors that their investments will be fairly treated by the state and that the rule of law will operate in private dealings. These challenges make Vietnam an ideal site for this comparison.
There are several reasons why international agreements may be more reassuring than domestic laws. First, the ratification procedures necessary to adopt international agreements are more visible than domestic legislation in many states. Second, international arrangements serve as a signal to foreign investors about a host government's willingness to uphold its commitment to domestic laws. Third, a process for investor-state dispute settlement (ISDS) was established as part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) and provides investors with alternative ways to settle disputes fairly with local firms.
Methods and Results
Researchers used a priming experiment embedded in the Provincial Competitive Index (PCI), the country's largest and most rigorous survey of investors, carried out annually by the Vietnam Chamber of Commerce and Industry (VCCI). The survey included a statement about either 1) a domestic law or 2) an international agreement that provides investment protection to foreign firms. Overall, more than 80% of foreign investors rated the legal protections in the document they were exposed to as adequate, regardless of whether it was a domestic law or international agreement. Firms that were exposed to the international agreement, however, were three percentage points more likely to believe in the adequacy
Additional analyses found that foreign investors exposed to the international agreement were significantly more likely to believe they could do greater business and expand their operations. (Foreign firms treated with the international agreement, for example, were between 7 and 14 percentage points more likely to increase their contracts with other firms and hence deepen their insertion into GVCs.) However, researchers also found that exposure to the international agreement did not increase the likelihood that a foreign investor would contract with state-owned enterprises (SOEs), implying that even international commitments cannot overcome the barriers to trust that firms have with government-owned businesses. Researchers concluded that internationalizing legal commitments is critical for optimizing the benefits of private commercial arbitration. When domestic governments bind their hands in international agreements, they instill greater confidence among foreign investors.
Edmund Malesky (Duke University), Helen Milner (Princeton University)
Economic Governance, Global Value Chains, Southeast Asia, Vietnam