Rising protectionism and foreign direct investment

This paper investigates the impact of the changing international investment regime on foreign direct investment (FDI). Since the late 2000s, hundreds of international investment agreements (IIAs) have been renegotiated or terminated. We study the impact of these shifts in the global investment regime using a novel FDI dataset based on transaction-level investment data and detailed information on IIA provisions. Relying on a stand-alone partial equilibrium modeling framework, we hypothesize that rising protectionism in IIAs increased investment frictions and harmed FDI. We then use a parsimonious three-way gravity framework to test the hypothesis. The empirical evidence shows that reformed and newly enforced IIAs have no impact on FDI flows. Decreasing investment openness in recently implemented IIAs is the driving mechanism behind these findings. We also show that the effects of IIA termination differ by FDI type, being more pronounced for brownfield than greenfield FDI and larger for horizontal than vertical FDI. Lastly, we show significant treatment heterogeneity across industries, with capital-intensive sectors benefiting more from IIAs than labor-intensive ones. Our findings highlight the need to reconsider the benefits and costs of IIAs under an increasingly protective international investment regime.