Which is more reassuring to foreign investors—domestic laws or international agreements? A substantial literature argues that foreign investment may be underprovided, because governments cannot offer credible guarantees that judicial institutions are impartial and that investors will be able to fairly resolve disputes with business partners and enforce contracts. This time inconsistency problem deters profitable business partnerships between foreign investors and domestic firms in the host country. Consequently, for emerging market leaders seeking to deepen their countries’ integration into global value chains (GVCs), enhancing the confidence of investors in contracting institutions is critical. In this paper, the authors study the emerging market of Vietnam to examine which type of reassurance mechanism is most successful. Using a survey of 1,583 foreign firms, they inform investors about either a domestic law or international treaty designed to strengthen commercial arbitration procedures. The authors find that priming foreign firms about the international investment agreement has a larger positive impact on their views about the future profitability of their projects and the likelihood of contracting with other firms in GVCs than simply learning about the commitments in domestic law.
Last modified: March 16, 2021
