Abstract
We examine the global ownership structure of firms in the context of the investment regime. Investment agreements extend valuable privileges to firms invested abroad. But, these privileges only apply to firms whose assets are owned in a country that has signed an agreement with their host market; firms lack protections under investment agreements for many of their target markets. We argue that, by strategically locating subsidiaries in ‘transit’ countries, firms systematically expand their access to investment agreements. This firm-specific access to investment agreements through transit countries also has implications for investment flows: Transit countries receive more inflows and outflows of investment. Moreover, the impact of agreements declines over time and treaty partners, as seemingly newly protected firms have previously gained coverage through subsidiaries. Drawing on subsidiary location choices of the world’s largest firms, as well as data on firm ownership structures and aggregate investment flows, we present systematic evidence consistent with this argument. The paper highlights the importance of the global ownership structure of firms in an environment of heterogeneous international rules and discusses new distributional consequences of the investment regime.
Highlights
In September 2007, Exxon Mobil initiated a US$7 billion claim for compensation against the government of Venezuela at the International Centre for Settlement of Investment Disputes (ICSID).1 The company alleged that Venezuela expropriated its assets, leading to a decline in revenue
By documenting that the fragmentation of firms across borders is a response to the fragmentation of the investment regime, we provide a political logic to the expansion of firms across countries
To evaluate whether these design differences translate into transit country choice, we identify, using information from UNCTAD’s International Investment Agreements Navigator, investment agreements with limited coverage, and investment agreements with limited delegation
Summary
With changes in financial markets and technology, firm ownership has become increasingly flexible and fragmented. These attempts to curtail the firm-driven expansion of investment agreements underscore the importance of ownership structures for access to international arbitration and highlight government opposition to this practice They illustrate the challenge governments face in reasserting control over the investment regime. Proposition 1 Firms are more likely to locate subsidiaries in countries that expand their access to investment agreements, relative to their home country, for relevant target markets. Proposition 2 Transit countries, which provide access to investment agreements that are not frequently available to firms located in other countries, should be associated with both more inward and more outward FDI These investment flows may not carry the benefits typically ascribed to FDI, such as managerial and technological spillovers or employment and income effects. Proposition 3 Investment agreements should become less effective in attracting FDI as the ability of firms to rely on transit-country coverage increases
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