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Domestic and foreign investors may differ in their information sets regarding future domestic and foreign stock returns with no information frictions. This may lead to home bias in the domestic country portfolio, which has important implications for the efficiency of domestic saving and investment.

The key mechanisms through which information frictions affect the composition and the volatility of international capital flows are market based. Foreign direct investors get more efficient outcomes than foreign portfolio investors because the former have more direct control over management. Thus, they are able to make a better-informed decision of how to run the business. However, the better information mires FDI investors with the “lemons” problem: If the investors’ liquidity dries up, forcing the investors to sell off foreign subsidiaries, market participants would not know whether the subsidiary is liquidated because of the investors’ liquidity problems or because of bad inside information about the profitability of the subsidiary. Consequently, the market will place a discount on assets sold by an FDI investor, who has the inside information, unlike the FPI investor. Thus, the liquidated stock of an FDI investor is sold at a discount. High-liquidity-risk investors opt for FPI investment, whereas low-liquidity-risk investors opt for FDI investment.

The chapter gives an in-depth look at two types of investment incentives used globally: International investment agreements (IIAs) as broadly available regulatory “incentives” to attract FDI and fiscal and financial R&D incentives as measures attract, sustain and shape investment activities. The chapter makes two main arguments: first, that while the rationale given for the use of investment incentives is that they can maximize public welfare, they are often instead primarily used to maximize the private welfare of decision makers who grant them, and may lead to an inefficient and welfare-decreasing allocation of resources. Second, that R&D incentives and IIAs are, respectively, of second-order importance in promoting R&D-intensive FDI, and in affecting investment decisions.

In the post-World War II period, business leaders, bankers, and their lawyers decided it was their time to write the rules of the global economy. They felt that the nationalization of the Anglo-Iranian Oil Company (in 1951) and of the Suez Canal (in 1956), together with increasing state economic intervention all around the world, warranted a call for action. They formed a coalition to enable and safeguard a world of free enterprise; promoting and protecting foreign private investment was a top priority. This chapter examines who these norm entrepreneurs were, their networks, and how they captured the space of international investment law to advance their world-making project. As individuals and through professional associations, they imagined quite detailed institutions and standards for this legal field. They discussed foreign investor rights, indirect expropriation, fair and equitable treatment, the internationalization of contracts, reliance, the inadequacy of local remedies, and the crucial role of international arbitration.

The chapter outlines the different motivations for FDI as well as the economic and institutional determinants of location choice for foreign investment, which is in turn fundamental for analyzing whether and to what extent different types of incentives can and should be used to influence those investment decisions. The chapter discusses the differences between market seeking, resource seeking, efficiency seeking and strategic asset seeking investment, each of which of has different implications for governments seeking to attract FDI, particularly through the use of incentives. The chapter also examines the policy challenges arising from a changing composition of FDI, including the shift to services, the increasing importance of non-equity modalities, the growth in market seeking investment into emerging markets, and the rise of market and asset seeking investment from emerging markets.

Investment has traditionally been regulated at the international level through bilateral investment treaties (BITs). Therefore, individual EU Member States have concluded their own BITs with third states, including Korea. As a result, the standards that currently apply to European and Korean investors will often vary depending on which BIT, if any, applies to them. Yet, recent amendments to the scope of the common commercial policy under the Treaty on the Functioning of the European Union mean that the EU is now competent to enter into treaties on this subject matter by itself. This development offers the opportunity to negotiate a uniform legal framework that applies equally to all European and Korean investors. This chapter starts by explaining the key areas of divergence in existing BIT practice. It then goes on to explain the extent to which investment is addressed under the EU-Korea FTA in the provisions on establishment and payments and capital movements. Having found that the FTA falls short of establishing a uniform regime for the protection of investors, the chapter explores the legal issues that may arise in the negotiation of a comprehensive EU-Korea investment agreement.

Chapter 1 reviews relevant Chinese government policies and trends in FDI. In doing so, this chapter identifies key sectoral and regional patterns of FDI and describes key changes in the competitive dynamics between local and foreign firms, laying the groundwork for the future empirical chapters. In short, as part of its economic reform strategy, the Chinese government initially allowed foreign multinationals to enter the market through joint ventures but gradually shifted to allow wholly owned subsidiaries in non-strategic industries, while removing the privileges they enjoyed in the past. The trends suggest that the driving force of multinational firms’ competitive advantages shifted from preferential government treatment, which encouraged FDI in labor-intensive industries in the earlier period of reform, to the possession of intangible resources like technology and brands, which led to a boost of FDI in technology or capital-intensive industries over the last decade.

Chapter 1 introduces the contents of the book by framing the context of international investment more broadly, contextualizing investment-related conflict management, identifying the issues related to cost, and exploring how cognitive psychology and data-driven analysis can offer a frame for considering the relative value of normative reform. After the initial framing, Chapter 1 provides an overview of international investment, with a historic context and a matrix for understanding the current dispute resolution options to set the stage for consideration of alternatives. It then describes ITA’s doctrinal foundation to explore the debate about the costs and benefits of ITA. The final section addresses the need to appreciate the relative value of policy options to make grounded, evidence-based normative choices for investment treaty dispute resolution.

This chapter provides the theoretic background and working hypotheses for the empirical tests that follow in subsequent chapters. The book is informed by substantial literature in several academic subfields, including but not limited to international political economy, international business studies, development economics, and global value chain research. This chapter builds a cumulative theoretic framework for interpreting multinational innovation and comparative institutionalist perspectives. Prior literature and debate inform the hypotheses presented in this chapter, which involve both country and firm level attributes and resulting investment patterns. The chapter considers ideas from international development studies regarding the role of multinational firms in processes of country growth and technological upgrading, theories of the firm and contemporary pressures for polycentric innovation models, and institutionalist perspectives from political science and political economy. This chapter also provides working definitions for key concepts and how institutions might be analytically separated from host country policies. The chapter emphasizes the theoretic support for the causal mechanisms supposed in the various hypotheses.

This chapter adds a case study of Ireland’s experience with FDI, as a complement to the cross-national investigations of preceding chapters. By considering a single country and its policies and institutions through time, this chapter adds context and policy relevance to the larger claims of the book. Ireland’s potential example for developing countries is considered, as well as its limitations. While Ireland has attracted a large amount of FDI since the 1990s, the country has not consistently exhibited innovation-intensive investment patterns. This chapter empirically examines the investment models adopted by firms in Ireland, and connects these strategies to the history of investment promotion and institutional development. This chapter demonstrates that institutions in Ireland did not until recently prioritize multinational embeddedness in the local economy, and that policymakers missed opportunities for innovation-intensive forms of investment. This chapter utilizes firm surveys, and also considers government support for innovation and domestic linkages. The chapter also contains a discussion of the possible implications of the Irish case.

A longstanding puzzle is that the United States is a net borrower from the rest of the world, yet continues to receive income on its external position. A large difference between the yields on direct investment at home and abroad is responsible and this paper examines potential explanations for this differential. We find that most of the differential disappears after one adjusts for the US taxes owed by the parent on foreign earnings, the sovereign risk and sunk costs associated with investing abroad, and the age of foreign direct investment in the US. Taken together, our results suggest most of the difference in yields should remain as long as there is a difference in tax rates between the United States and the countries in which US firms invest, and US investments are perceived as relatively safe. This has implications for the long-run sustainability of the US current account deficit which will depend, in part, on the long-run behavior of this income.

This chapter suggests that investment schemes should be redesigned according to a location’s sustainable development objectives and the potential contributions of FDI toward sustainable development. Not only will this help to avoid wasteful or inefficient incentives, the authors argue, but, by promoting sustainable development through incentive programs, governments could improve the viability of important investments (such as in electricity, water supply, health and education services), making those services more accessible and affordable for the poor, and the jurisdiction a more attractive investment destination.

This chapter situates the book in its theoretic and empirical contexts. It reveals the key observable motivation for the book; that multinationals are increasingly locating innovation in peripheral or developing economies. After briefly reviewing literature from political science, economics, and international business, the chapter summarizes the argument of the book: host country institutions, not only internal firm characteristics, are important determinants of innovation-intensive forms of international investment. The chapter contends that many existing political economy studies of foreign direct investment treat these flows as uniform, when in fact there is tremendous heterogeneity of investment models. Advancements in data collection allow deeper analysis of this heterogeneity than in decades past. The chapter provides background information on the different data sources used in the remainder of the book. The chapter also includes discussion of the implications of the argument for various academic disciplines, and draws attention to how multinationals are or are not embedded in local economies. The chapter concludes with a road map for the rest of the book.

This chapter chronicles the spread of innovation-intensive forms of foreign investment. It is primarily descriptive, and provides the empirical context for the econometric tests in subsequent chapters. The multifaceted concept of innovation is investigated in detail in this chapter. Historical patterns of multinational innovation are presented, followed by more recent empirical trends. The evolving sectoral distribution of FDI in developing countries is examined, as are the potential implications for innovative activities. The chapter extensively details patterns of multinational innovation, through firm surveys and aggregated country level data. Additionally, the extent of innovation spillovers and linkages with economic actors in host countries is considered. Among the core findings in this chapter are that innovation is becoming more common in developing countries, innovation is concentrated in specific regions, and service sector investment represents an increasing share of investment in emerging economies. Firms in some sectors are also more likely to embed in host economies than firms in other sectors.

This chapter considers innovation outcomes among multinational firms in emerging economies. A variety of econometric tests are conducted, in which innovation is predicted by different firm and country level variables. Innovation is measured in different ways, from patenting activity to firm R&D spending levels. Various datasets are used in this chapter, including firm surveys and patent counts. This chapter tests a number of the hypotheses developed in chapter 2, using different modelling strategies. Statistical analysis is emphasized, however case studies also appear to illustrate the dynamics and mechanisms contained in the models. The firm identifies a number of firm and country characteristics that impact the innovation proclivity of multinational firms. The size of certain economic sectors within the host country, in particular the natural resource sector, also impacts the likelihood of multinational innovation.

This chapter moves beyond firm level attributes and economic motivations to consider the impact of host country institutions on investment models of multinationals in developing countries. It adopts a comparative institutionalist perspective, and utilizes country and firm level variables to measure governance. These measures are then employed to predict innovation outcomes. This chapter demonstrates that host country institutions affect the likelihood of local innovation taking place, and its intensity. A variety of measures of institutional coherence are developed, and address such diverse concepts as intellectual property protection, corruption, democracy, and bureaucratic quality. In addition, firm surveys are used to convey firm perceptions of institutional quality in host countries. The chapter includes a discussion of the literature on firm entry modes, and considers how other host country attributes, such as education and human capital, may influence innovation outcomes alongside institutions.

Foreign investment is perceived as one of the most significant factors for development and it is no accident that a key criterion for determining that an activity qualifies as an investment under the ICSID Convention is whether it contributes to the economic or other development of the host state. Investment tribunals have in recent years examined the ambit of regulatory powers of the host state in taking measures in response to an existing debt crisis, but investment tribunals have not conclusively, or unanimously, linked socio-economic rights with investment protection. This chapter will examine the sovereign debt-related awards of investment tribunals and how foreign investment may contribute to the accumulation of sovereign debt as well as how it may be used as a tool to decrease such debt.

This chapter examines the evolution of the essential security exception in trade and investment agreements in the United States. It considers two notable trends: the latest generation of U.S. agreements now explicitly removes from the scope of review any actions that a party asserts fall within the scope of the exception; the international community, including the United States, is developing best practices to ensure that investment screening mechanisms such as the Committee on Foreign Investment in the United States (CFIUS) operate as tools to protect essential security rather than as a means of disguised protectionism. The chapter first provides an overview of the general U.S. policy on the relationship between international agreements and essential security before turning to a discussion of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), along with U.S. treaties of friendship, commerce, and navigation. It then analyzes the negotiating experience of the North American Free Trade Agreement (NAFTA) and concludes by summarizing the current state-of-play of the essential security provisions in U.S. trade and investment agreements.

This chapter summarizes the main arguments of the book and repeats the central empirical findings. Following a brief discussion of the data sources used to support the varied arguments, this chapter considers the lessons for theory and its strong comparative institutionalist perspective. Policy implications of the book are also considered in this chapter, and the link between institutional and policy reform and innovation outcomes is again emphasized. This chapter considers also the limitations of the book, and the ways the book’s arguments and analysis might be constructively challenged/amended in the future. There are a number of issues not explicitly addressed in the book because of its domestic institutionalist focus, including international treaties on intellectual property rights. The chapter concludes with some suggestions on how these future research agendas might be integrated with existing literature.