The effects of bilateral and regional investment agreements on the FDI inflows into ASEAN countries

The competition for foreign direct investment (FDI) has resulted in many developing countries resorting to international investment agreements (IIAs) as a legal mechanism to encourage FDI based on the basis that these international commitments are more credible than domestic policy choices for the cost of reneging on them is more costly. IIAs are legal instruments that contain a set of rules governing FDI and specifying the rights and obligations of foreign investors, investing countries and recipient countries. The proliferation of IIAs over the years illustrates the belief of the policymakers in the efficacy of these policy instruments in helping to attract FDI. However, there is still very limited empirical evidence to support the claim of their positive role. The aim of the research is to contribute to the existing empirical literature on FDI by incorporating international FDI policies that to date have not yet been thoroughly studied. It employs Dunning's ownership-location-internalization (OLI) framework to investigate the extent to which investment agreements play a role in attracting FDI inflows from within ASEAN and outside ASEAN to the countries and compare these influences with those of other macroeconomic and institutional factors over time. The analysis is undertaken using a panel data set covering ten ASEAN countries over the period 1980-2005. The findings demonstrate that BITs or the bilateral type of IIAs made with developed countries have a positive impact on FDI inflows into ASEAN countries and confirm the crucial role played by the quality of domestic institutions. The results are robust to changes in model specification. The empirical results also indicate that BITs function as a complement rather than a substitute for domestic institutional quality. However, there is no evidence that the ASEAN Investment Area, which is a regional type of IIA made among ASEAN nations serves to stimulate intra-regional or inter-regional FDI flows to the region.