International investment agreements and FDI inflows in Africa

Using investment-level data, we study how international investment agreements (IIAs) influence the location choice of foreign direct investments (FDI) in Africa. We consider almost 10,000 greenfield investments in 43 African destinations from 119 origin countries over the 2003-2017 period. Differently from previous literature, we address three sources of heterogeneity in the effects of IIAs: the kind of activity localized abroad, the origin of the investor, and the quality of host country institutions. We document a positive relationship between the existence of IIAs and the location of FDI in African countries, which is stronger for FDI in service activities and originating from less developed countries. We also show that destinations with better functioning institutions benefit more from IIAs, suggesting a complementary relationship between IIAs and institutional quality in attracting FDI. Resource-seeking FDI stand out as a peculiar case for which IIAs appear to act as substitutes for effective institutions. Our findings suggest that African countries, especially those with well-functioning institutions, are expected to benefit from signing IIAs.