How Does BIT Design Impact FDI and International Joint Ventures in Politically Risky Countries?

Abstract

We investigate the dynamic impact of legal legitimacy on MNE international strategy by studying how the stringency of bilateral investment treaty (BIT) provisions between national governments impacts FDI and entry mode strategy over time. Drawing primarily on institutional and transaction cost theory, we argue that the level of FDI inflows and the number of international joint ventures (IJVs) in a country should not only increase in absolute terms with the ratification of BITs involving that country, but also as a result of the stringency in the design of those BITs. Based on an analysis of datasets of investments made over three decades, we demonstrate that the number of IJVs and the total FDI inflows increase as legal legitimacy (expressed as both BIT presence and BIT stringency) improves, but only in developing countries with high political risks. We contribute to research on the relationship between international strategy and international legal institutions by showing how the stringency of BIT design...