The Causes of FDI Inflows: The Interactions Between Domestic and International Commitment Mechanisms

Abstract

Under what conditions do Foreign Directed Investment (FDI) inflows increase? As the role of FDI in the global economy has become increasingly important, the number of studies seeking to uncover the factors which determine these flows has grown significantly. In this paper, we focus on the role of institutions in attracting FDI inflows. I agree with previous research that both domestic institutions (i.e. property rights, democracy) and participation in international institutions (i.e. WTO/GATT and BITs) provide credible commitments to private investors that the country protects the rules of the game, and accordingly, they have a positive impact on attracting foreign investment (Ahlquist 2006, Choi and Samy 2008, Büthe and Milner 2008, Jensen 2003, 2004, 2006, Li and Resnick 2003). However, building on Staton and Reenock (2009) I further argue that the two types institutions can substitute for each other in attracting FDI inflows.