Emerging market multinationals and international investment agreements

Abstract

This study investigates the effects of international investment agreements (IIAs) on the internationalization decisions of emerging market multinationals (EMNEs). Drawing on the POLI advantage framework, we argue that bilateral investment treaties (BITs) add to the political and institutional capabilities of EMNEs, enhancing their OLI advantages in host countries. We identify two mechanisms through which BITs facilitate EMNEs’ internationalization: by offsetting political risk and by mitigating the informational asymmetries and transaction costs associated with investing in unfamiliar destinations. We probe the plausibility of our claims with data from an original survey of firms in four emerging economies and a larger sample of bilateral FDI flows from UNCTAD’s FDI/MNEs database. Our findings show a positive association between BITs and FDI from the South, especially in politically unstable and unfamiliar contexts. Apart from adding to the International Business literature on EMNEs, this study contributes to International Political Economy scholarship on FDI by highlighting the growing relevance of South-South IIAs.