Institutions sans frontieres: International agreements and foreign investment

We examine whether the presence of International Investment Agreements (IIAs), negotiated among countries for foreign investor protection, lowers political risk faced by multinational enterprises (MNEs). Drawing on research from international business, political science, and international law, we argue that IIAs increase expected future cash flows, and hence the value of foreign assets, by limiting the ability of host governments to make discriminatory policy changes. However, the need for IIA protection, and the ability to benefit from it, varies with firm characteristics. Using detailed transaction-level data for sale of petroleum assets in 45 countries, we find that MNEs pay significantly higher amounts for those protected by IIAs than similar but unprotected assets, an effect moderated by the firm's reserve size and state ownership.